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Glossary

Zero-coupon bond

Bond that has no interest coupons, which therefore does not yield periodic interest payments.

Zero-coupon bonds are discount securities, i.e. the interest on the bond is not paid until the bond matures. Zero bonds are issued at a discount of up to 25 percent below their face value, and are redeemed at their face value upon maturity. The interest rate is calculated on the basis of the difference between the purchase price and the face value. Zero-bonds are useful to investors as a means of reducing their tax burden because the interest is not taxable until the bond matures. One risk associated with zero-coupon bonds is that if the issuer were to become insolvent, the investor would forfeit all profit on the bond; moreover, counterfeit zero-bond certificates are often not discovered until the end of the maturity period.


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