Zero Coupon Bond is a debt instrument that does not pay interest. This type of a bond is traded at a discount and renders profit on maturity as a bond is redeemed for its full face value. A zero coupon bond is also known as an accrual bond. The fluctuation in the price of this type of a bond is much more than regular/coupon bonds.
Zero coupon bonds vs. Regular bonds
Some of the differences between the two types of bonds are:
- The most basic difference between the two is the interest payments. While regular bonds makes interest payments to the bondholder, the other one does not.
- A zero coupon bond gains from the difference between the face value and the purchase price, whereas regular bond gains from the interest payments.
Good for Long Term Investors
These bonds are a good option for those who want a fixed amount after a specific point in time. Imagine you want to plan something for your after retirement years and your retirement is due in 10 years. You can actually invest in zero coupon bonds with a maturity period of say 15 years. Not only will you be a little relieved about your future but also, you will not have to spend any extra money on the same for next 15 years. And when those bonds mature, they will be redeemed at their face value.
Zero coupon bonds are also a great option for those investor who have little interest in the ups and downs of the financial market. It’s like a buy it and forget it kind of an investment.
Debt instruments like government or corporate bonds and mortgages are out there in the market to help the investors. Another facet of debt instruments is the zero coupon bond which is very beneficial to the long term investors and brokers.The comparison explained here differentiates between regular ones and zero coupon bond.