What is: Zero Interest Bonds

What is Zero Interest Bonds?

Zero interest bonds are a type of bond that does not pay any interest to the bondholder. Instead, these bonds are issued at a discount to their face value and are redeemed at face value at maturity. This means that investors do not receive any interest payments throughout the life of the bond.

How do Zero Interest Bonds Work?

When an investor purchases a zero interest bond, they pay less than the face value of the bond. For example, if a zero interest bond has a face value of $1,000 and is issued at a discount of $900, the investor pays $900 to purchase the bond. At maturity, the investor will receive $1,000, resulting in a $100 profit.

Benefits of Zero Interest Bonds

One of the main benefits of zero interest bonds is that they can provide a guaranteed return at maturity. Since the bond is redeemed at face value, investors know exactly how much they will receive when the bond matures. Additionally, zero interest bonds can be a good option for investors who are looking for a low-risk investment.

Risks of Zero Interest Bonds

While zero interest bonds offer a guaranteed return at maturity, they also come with some risks. One of the main risks is that the bond issuer may default on the bond, resulting in a loss for the investor. Additionally, since zero interest bonds do not pay any interest, investors do not receive any income from holding the bond.

Types of Zero Interest Bonds

There are several types of zero interest bonds, including zero coupon bonds and deep discount bonds. Zero coupon bonds are bonds that are issued at a deep discount to their face value and do not pay any interest. Deep discount bonds are similar to zero coupon bonds, but may have a longer maturity period.

Investing in Zero Interest Bonds

Investing in zero interest bonds can be a good option for investors who are looking for a low-risk investment with a guaranteed return. However, it is important for investors to carefully research the bond issuer and understand the risks involved before investing in zero interest bonds.

Conclusion

Zero interest bonds can be a valuable addition to a diversified investment portfolio, providing a guaranteed return at maturity. However, investors should carefully consider the risks and benefits of investing in zero interest bonds before making any investment decisions.