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Zero Coupon Bond

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What is the "zero coupon bond"? How it is issued, valued in the market, and which investor should consider a zero coupon bond?

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Solution Summary

This solution defines zero coupon bonds and discusses how it is issued, valued in the market and what investor should consider a zero coupon bond.

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Zero coupon bond is a bond that pays no annual interest but is sold at a discount below par, thus providing compensation to investors in the form of capital appreciation. In other words, these bonds pay no coupons at all, but are offered at a discount below their par values and hence provide capital appreciation rather than interest income.

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