zero coupon bond

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A bond that does not make any periodic coupon payments. A zero coupon bond is sold at a discount from its face value but pays the face value at maturity. For example, a zero coupon bond with a face value of £1 000 and one year to maturity may sell for £909. The return to the investor is determined by the discount. For the example, £909 invested in the bond is rewarded with the face value of £1 000 a year later, which is an annual return of 10 percent.

Subjects: Economics.

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