A zero-coupon bond makes no periodic coupon payments and is typically bought at a discount, with return realized through accretion toward maturity value.
A zero-coupon bond is a bond that does not make periodic coupon payments. Instead, it is typically purchased below face value and pays face value at maturity if the issuer performs, so the investor’s return comes from the discount accreting toward the maturity payment.
The simplified price of a zero-coupon bond is the present value of the maturity payment:
Where P is price, F is face value due at maturity, r is the discount rate per period, and n is the number of periods. The formula assumes payment occurs as expected and does not address taxes, default, liquidity, or call features.
Assume an eight-year zero-coupon bond has a $10,000 face value and the market requires a 4.5% annual yield, compounded annually. Its simplified price is:
The $2,968.15 difference between price and face value is not an immediate cash payment. It is the discount that can accrete toward face value over the bond’s remaining life if the required yield stays unchanged and the issuer performs.
After one year, the same bond would have seven years remaining. At the same 4.5% yield, its model price would be $7,348.28, an increase of $316.43. That increase equals 4.5% of the starting price, but the investor still receives no coupon cash during the year.
The required yield matters materially even when the maturity payment is unchanged:
| Required annual yield | Simplified price today |
|---|---|
| 3.5% | $7,594.12 |
| 4.5% | $7,031.85 |
| 5.5% | $6,515.99 |
These are valuation estimates, not guaranteed sale prices or returns. Credit deterioration, liquidity, taxes, transaction costs, compounding conventions, and changes in required yield can produce a different outcome. Taxable accrued interest may also differ from the simple market-value accretion shown here; investors should use issuer tax documents and qualified tax guidance for their circumstances.
| Feature | Zero-Coupon Bond | Coupon Bond |
|---|---|---|
| Periodic interest | None | Scheduled coupon payments. |
| Cash-flow timing | One maturity payment | Coupons plus principal repayment. |
| Reinvestment risk | Lower for interim coupons because there are no coupons | Coupon payments must be reinvested. |
| Price sensitivity | Often higher for same maturity and credit quality | Usually lower because cash returns earlier. |
| Tax timing | May create imputed or phantom income | Often tied more directly to cash coupon income. |
Zero-coupon bonds can help match a known future cash need because the maturity payment is concentrated on a specified date, subject to issuer performance. They are also useful in fixed-income analytics because they isolate discounting without interim coupon reinvestment.
The tradeoff is risk concentration. Long-maturity zeros can be very sensitive to yield changes. Corporate or municipal zero-coupon bonds also carry issuer credit and liquidity risk. This page is educational and is not investment, tax, or legal advice.