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A zero-coupon bond is a discounted investment that can help you save for a specific future goal

Added 11-25-20 01:14:02pm EST - “A zero-coupon bond doesn't pay periodic interest, but instead sells at a deep discount, paying its full face value at maturity.” - Businessinsider.com

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Posted By TheNewsCommenter: From Businessinsider.com: “A zero-coupon bond is a discounted investment that can help you save for a specific future goal”. Below is an excerpt from the article.

The big appeal of bonds, for many investors, is the interest income they provide. So the idea of buying a bond that doesn't pay any interest may seem, well, paradoxical. Yet a healthy market does exist for such an instrument: the zero-coupon bond, colloquially known as "zeros."

Savvy investors often look to zero-coupon bonds because they can be bought at a deep discount to their face value — that is, the nominal amount they're worth. But when they mature, you receive their full face value. So that's how you profit: the difference between that initial discounted price, and what you collect when the bond comes due.

The biggest draw of zero-coupon bonds is their reliability. If you keep the bond to maturity, you will essentially be guaranteed a sizable return on your investment. That makes them useful for targeted financial needs, like college tuition or down payment on a home. 

Typically, bondholders make a profit on their investment through regular interest payments, made annually or semi-annually, known as "coupon payments." However, as the name suggests, zero-coupon bonds work differently. They have no coupons, and they don't pay interest at a periodic, fixed rate.  

That's not to say interest isn't calculated, though. Rather, the bond's interest is totaled up in advance and knocked off the bond's purchase price. Essentially, when you buy a zero, you're getting the sum total of all the interest payments upfront, rolled into that initial discounted price.

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