Zero Coupon Bond Definition with Example
Zero Coupon Bond Definition – “A bond sold at discount rate and repurchase at face value. There is no interest payments”
Unlike other types of bonds that comes with an attached interest rate, zero coupon bond do not comes with any interest rates. In addition to this, these types of bonds are sold at discount rate and redeemed at face value of the bonds on the maturity date. The difference between the discount rate and face value is the returns of the bond holder. In simple words, an bond in which the coupon is snatched from the bond is known as zero coupon bond.
Why Invest in Zero Coupon Bonds?
The investment in these bond is a long term investment as there maturity time is ten or more than ten years. Some investor does not go for investment in these bonds as they do not provide steady income. However investors who have long term financial goals, investment in these bonds is considered good by them. At the time of redemption, investors get a huge size of sum which is satisfactory for them as well as fulfill their financial goals.
The best time to purchase zero coupon bonds is when the interest rates are high. If someone buys municipal zero coupon bond, then they can also exempt tax from the money they are making by investing in these bonds.
Zero Coupon Bond Example
In order to understand the zero coupon bond definition more clearly, let’s discuss and example. Company XYZ is selling the zero coupon bond of face value Rs. 1,000 at discounted price of Rs. 700. The maturity period of the bond is 10 years. So, if an investor invests in zero coupon bond, then he will give Rs. 700 and at the time of redemption, the bond will be redeemed at Rs. 1,000.