A zero coupon bond does not send you coupon cheques along the way. You buy it at a discount and, if the issuer pays as promised, you receive face value at maturity. The gap between purchase price and face value is your return, often described through yield to maturity.
Key takeaways
- Duration and price sensitivity to rate changes are typically high for long zeros.
- Even with no cash coupons, tax rules in some places still impute interest each year. Check local treatment.
- You must be able to wait until maturity or accept market price swings if you sell early.
- Compare zeros with coupon bonds on a yield basis, not only on the size of the discount.