Finance: What is a zero coupon bond?

What is a zero coupon bond? Zero coupon bonds are an interesting investment because they don’t pay any interest. They are only desirable because they can be bought at huge discounts, so after the investor waits it out and cashes in at maturity, they usually make a decent profit.

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Transcript

00:21

rent paid by the corporation or government or individual who's

00:24

Borrowing that money sofa bond has zero coupon Does that

00:27

mean the rental of that capital is free Uh no

00:31

not at all Isiro coupon bond with par value of

00:37

a thousand might sell initially for say seven hundred twenty

00:41

dollars iy a big discount to that grand the bonds

00:44

interest is on ly paid cumulatively at the very end

00:50

when the person who loaned the seven hundred twenty dollars

00:53

gets his grand back that's it it's a one time

00:55

payment of a thousand bucks so many years later like

00:58

a decade of that bond yielding a bit over three

01:01

point three percent if you did the math of compounding

01:04

well this is what it would look like Note that

01:07

the amount owed at the end of the year is

01:09

mohr than what was owed the previous year and that

01:13

the interest is charged than on that amount Well in

01:16

real life these calculations are done twice a year with

01:19

bonds that is every six months the interest rates are

01:21

charged Zero coupon bonds yield notably more than normal bonds

01:25

which pay interests every six months Why Why With zero

01:29

coupon bonds yield mohr risk in paying some interest at

01:33

least some each six month period Well the bondholders getting

01:37

something back along the way and over time the interest

01:40

payments can be More than the principal loaned itself So

01:43

with zero coupon bonds Well there's Just a one time

01:47

payment at the very end So you'd better hope the

01:50

person showing you that money doesn't You know just decide

01:54

to skip town a week before the principal and interest

01:56

combined Or do speaking of which i've got a flight 00:02:00.288 --> [endTime] to catch No