Zero coupon bond finance


How Does It Work?

Now what happens if you combine features of these two types of unusual bond and create a zero coupon perpetual bond? The formula for calculating the value of a perpetual bond is shown below. This is a very simple calculation for a Zero Coupon Perpetual bond. Zero divided by anything is zero.

Zero-Coupon Bond - Definition, How It Works, Formula

Summing up an infinite stream of zeros, strangely enough is also zero. Now who would ever be crooked enough to ever sell a bond that does not pay interest or repay the capital?

How to value Zero Coupon Bonds (aka "Deep Discount" Bonds) - Finance Tutorial

Who would be stupid enough to buy a security like this? Could it even exist in this world?

Sadly, in recent years, thousands of what are effectively Zero Coupon Perpetual bonds have been issued and billions of dollars have been spent buying them. The otherwise closest investment, in economic terms, to Zero Coupon Perpetual Bonds, are pyramid schemes.

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Pyramid schemes are a slightly better bet through because if you are an early investor, the organiser of the scheme may pay you some money. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

Zero-Coupon Bonds

Copyright FMG Suite. Investors become lenders and earn a return through semi-annual to annual coupon payments. Those payments are made throughout the life of the bond. When the bond matures, the bondholder is repaid an amount equal to the face value or par value of the bond.

Bonds are sometimes issued at a discount below its par value. Those bonds are issued at a deep discount and repay the par value at maturity. There is no coupon payment, hence the name.


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That earned interest is taxable imputed interest at an estimated rate. A zero coupon bond allows for a larger return than a regular bond once the bond matures. The U.

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Zero coupon bond finance

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