Zero Coupon Bond

A zero coupon bond is a type of debt instrument that does not pay periodic interest payments. Instead, it is issued at a significant discount to its face value and matures at the full face value, with the difference representing the investor's return. Zero coupon bonds are sensitive to interest rate changes and are often used for long-term financial planning.

An investor might purchase a zero coupon bond with a face value of $10,000 for $6,000 today, with a maturity date ten years in the future. The $4,000 difference represents the total return earned over the holding period. For traders, zero coupon bonds are particularly sensitive to interest rate movements — because there are no interim coupon payments to offset price fluctuations, their prices move more dramatically in response to rate changes than standard bonds. This makes them a useful instrument for traders with directional views on long-term interest rates.