Zero Coupon Bonds

What are zero coupon bonds?

Zero coupon bonds or just zeros are unlike most bonds that pay interests during the life of the bonds. Zero coupon bonds do not pay interests, hence the name zero coupon bonds.

The video below explains what a zero-coupon bond is and why investors like to invest in zero coupon bonds even though zero coupon bonds do not pay interests regularly.

How to make money with Zero Coupon bonds?

Since zero coupon bonds do not pay interests, bond investors will not make money during the life of the bonds unless they sell the zero coupon bonds at premium, making a profit in the secondary market. All zero coupon bonds are sold at deep discount, therefore, at maturity, the zero coupon bonds investors will get a lot more money back than they invested in the zero coupon bonds as a lump sum.

When do zero coupon bonds mature?

The maturity dates of zero coupon bonds are often set far far in the future. Although very volatile, zero coupon bonds are considered long term investments and zero coupon bonds often mature in 10-15 or more years. When investing in zero coupon bonds, you need to plan your investment goals long term such as for college education of your infant children.

How volatile are zero coupon bonds?

The volatility of zero coupon bonds is high. Since zero coupon bonds do not pay interests until maturity, zero coupon bond prices fluctuate widely. Zero coupon bonds are often much more volatile than other types of bonds. Zero coupon bonds are risky and are usually not suitable for conservative investors and more suitable for investors who can speculate and take on more risks.