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Finance
Zero-Coupon Bond
A bond that pays no interest during its life but is sold at a deep discount and pays full face value at maturity.
Zero-coupon bonds are popular for long-term goals like college funding because there are no reinvestment decisions. They are more sensitive to interest rate changes than regular coupon bonds because all the return comes at the end.
It's like buying a savings bond that grows quietly in the drawer and suddenly pays you the full amount years later.
Real world: A £1,000 zero-coupon bond maturing in 10 years might be sold today for £600. The investor makes £400 profit at maturity with no interest payments along the way. The difference is the implied interest.
💡 Zero-coupon bonds let you lock in a return today and forget about it until maturity.