Economic Universe

Zero Coupon Bond 📑

A bond as a debt instrument can be developed in various forms with different features that formulate it as a completed product. One of the types of bonds is the zero coupon bond.

This particular bond does not issue any coupon/interest payments during its lifetime. The bond is being issued at a price lower than its par value/face value price which is the actual value of the bond. After it reaches its maturity the bond issuer executes a payment in the actual face value of the bond classified as a premium on the initial investment by the bondholders at a discount price of the bond. The spread between the discount at which the bond has been issued and the premium at which it has been repaid to the creditors/bondholders is the nominal profit acquired by the bondholder. To calculate its real profit a bondholder has to include the purchase and sale commission of the debt security as a cost, with included time value of capital calculation with an appropriate discounting factor after which the investor has a real rate of return expressed in both percentage and monetary value.

Although these bonds do not have interest attached to them, you can simply find an interest rate at which the debt is being repaid at the end of its maturity by executing above mentioned calculation.