What are 'zero-coupon bonds'? Definition & meaning

What is a zero coupon bond?

A zero coupon bond is a bond that does not make interest payments.

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This type of bond is issued at a discount to its maturity value and is redeemed at the maturity value, generating a return for the investor.

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UK Treasury bills are an example of a zero coupon bond.

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Zero coupon bonds can be issued by governments, municipalities, and companies.

More terms

Profit and Loss Statement (P&L)

A statement that summarises firm's expenses, costs, and revenues incurred during a time period. AKA income statement.

Base rate

What's the base rate?

Geometric Mean Return

A way of calculating compound returns on an investment or savings over a set period of time.

Year to Date (YTD)

A period of time that starts with the first day of the current calendar year and ends with today.

Running yield

The annual interest payment (dividend) divided by the current market price of a bond.

Rate of Return

Profit on an investment, expressed as a percentage of the investment.

Gross Margin

The difference between a company's revenue and the cost to produce its goods/services, divided by revenue.

Retail Prices Index (RPI)

An index published each month by the Office for National Statistics, which measures the level of retail prices in the UK. Cash flows on all index-linked gilts are linked to the RPI.

index-linked gilts

Gilts where the dividends and principal repayments are related to movements in the Retail Prices Index (RPI). This is as opposed to a conventional gilt, where the dividends and principal repayments are fixed in nominal terms.

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Zero coupon bond