Zero-Coupon Bond
A zero-coupon bond is a debt security that does not pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value. The discount rate of the bond is determined by the market forces of supply and demand. Zero-coupon bonds are also known as pure discount bonds or deep discount bonds.
History of Zero-Coupon Bonds
Zero-coupon bonds have been around since the late 19th century. The first zero-coupon bonds were issued by the US Treasury in the 1880s. The bonds were issued in denominations of $50 and $100 and were redeemable at par value after a period of 10 years. The bonds were issued to finance the Spanish-American War. Since then, zero-coupon bonds have become a popular investment vehicle for investors looking for a safe and secure way to save for retirement.
In the 1970s, zero-coupon bonds became more widely available to individual investors. The bonds were issued by corporations and municipalities as well as the US Treasury. The bonds were attractive to investors because they offered a guaranteed return at maturity and were exempt from state and local taxes.
Comparison Table
| Type of Bond | Interest Rate | Tax Treatment |
|---|---|---|
| Zero-Coupon Bond | None | Exempt from state and local taxes |
| Coupon Bond | Fixed rate | Subject to state and local taxes |
Summary
Zero-coupon bonds are a type of debt security that does not pay interest but is traded at a deep discount. The bonds are attractive to investors because they offer a guaranteed return at maturity and are exempt from state and local taxes. For more information about zero-coupon bonds, investors can visit the websites of the US Treasury, the Securities and Exchange Commission, and other financial institutions.
See Also
- Coupon Bond
- Treasury Bond
- Municipal Bond
- Corporate Bond
- Yield Curve
- Interest Rate
- Maturity Date
- Par Value
- Face Value
- Discount Rate
