Course 204: Zero-Coupon Securities
What Are Zero Coupons?
In this course
1 Introduction
2 What Are Zero Coupons?
3 Types of Zero-Coupon Securities
4 Strategic Considerations of Zero Coupon Securities
5 Zeros Are a Unique Twist on Bonds

Like bonds, zero-coupon securities are debt instruments issued by the U.S. Treasury, municipal governments, corporations, and brokerage firms.

With traditional bonds, the coupon rate is the rate of annual interest the issuer pays to the bondholder. The "zero" in "zero coupon," then, means that this kind of security does not make any interest payments, as bonds do.

Why would anyone go for that deal? Because zero coupons are issued at discounts usually far below the face value, or par, of the security. For example, if a company sells you a $1,000 bond for only $700, it's a zero-coupon bond.

As with bonds, the issuer pays the holder the par value when the instrument reaches its maturity date. So, while your zero coupon will not make regular interest payments while you hold it, it will pay out much more than you paid for it when it matures. While this growing value appears to be similar to the capital appreciation of an investment in stocks, it is essentially compounding interest income, not a capital gain.

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