Zero-Coupon Bond.

In plain English

A zero-coupon bond is a bond that makes no regular interest payments along the way. Instead, you buy it at a discount, meaning for less than its face value, and you receive the full face value when it matures. Your return comes entirely from that gap between the discounted purchase price and the amount paid back at the end. Because all the value lands on one future date, zero-coupon bonds have high duration and their prices swing a lot when interest rates move.

01Why it matters

Zeros let you lock in a known lump sum for a future date like a child's college start, but their prices are unusually sensitive to rate changes if you have to sell early, and you may owe tax on interest you have not actually received yet.

02The math, step by step

Suppose you buy a zero-coupon bond for 6,000 dollars that matures in 10 years at a face value of 10,000 dollars. You receive no checks in between. At maturity you collect 10,000 dollars, and the 4,000 dollar gain is your entire return. Note that with a taxable zero, the IRS can treat part of that built-in growth as interest income each year, so you might owe tax annually even though no cash arrives until the end.

03What this is NOT

04Receipts

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