ABSTRACT
A bond sold at a deep discount, the zero-coupon bond pays no periodic interests (hence the name), so the total yield is obtained entirely as capital gain on the final maturity date. The interest is added to the principal semiannually and both the principal and the accumulated interest are paid at maturity. Although a fixed rate is implicit in the discount and the specific maturity, they are not fixed income securities in the traditional sense because they provide for no periodic income. Although the interest on the bond is paid at maturity, accrued interest, though not received, is taxable yearly as ordinary income. Zero coupon bonds have two basic advantages over regular coupon-bearing bonds: (1) a relatively small investment is required to buy these bonds and (2) a specific yield is assured throughout the term of the investment.
