Introduction
Zero-coupon bonds are a unique investment option that many investors may not be familiar with. Unlike traditional bonds‚ these bonds do not pay any interest during their term but are issued at a discount to their face value. In this article‚ we will explore the features and benefits of zero-coupon bonds and how they can be used as part of a well-diversified investment portfolio.
How Zero-Coupon Bonds Work
Zero-coupon bonds‚ also known as discount bonds‚ are issued at a discounted price and do not make any periodic interest payments to investors. Instead‚ they are purchased at a price significantly lower than their face value and are redeemed for the full face value at maturity.
For example‚ let’s say you purchase a zero-coupon bond with a face value of $1‚000 at a price of $800. The bond will not pay any interest over its term‚ which is typically several years. However‚ at maturity‚ you will receive the full face value of $1‚000. This means you will earn a profit of $200‚ which is the difference between the purchase price and the face value.
