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Zero-Coupon Bond

A bond that does not pay interest during its life. Zero-coupon bonds are purchased at a discount from their face value. When a zero-coupon bond matures, the investor receives the face value of the bond. The market value of a bond will fluctuate with changes in interest rates. As rates rise, the value of existing bonds typically falls. If an investor sells a bond before maturity, it may be worth more or less that the initial purchase price. By holding a bond to maturity, an investor will receive the interest payments due plus his or her original principal, barring default by the issuer. Investments seeking to achieve higher yields also involve a higher degree of risk. Bond prices rise and fall daily. Bonds are subject to a variety of risks, including adjustments in interest rates, call risk, market conditions, and default risk. When interest rates rise, bond prices generally will fall. Certain municipal bonds may be difficult to sell. A bond issuer may be unable to make interest or principal payments, which may lead to the issuer defaulting on the bond. If this occurs, the bond may have little or no value. If a bond is purchased at a premium, it may result in realized losses. It’s possible that the interest on a municipal bond may be determined to be taxable after purchase.