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A bond that pays no interest payments (coupons)
during its lifetime. The interest is included with the repayment of
principal maturity. They trade at a substantial discount from par,
and are sold at a deep discount to its face value, and matures at
its face value. A zero-coupon bond has the important advantage of
being free of reinvestment risk, though the downside is that there
is no opportunity to enjoy the effects of a rise in market interest
rates. Zero coupon bonds tend to be very sensitive to changes in
interest rates, since there are no coupon payments to reduce the
impact of interest rates.
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