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NISM Certifications · NISM-Series-XV: Research Analyst · Terminology in Equity and Debt Markets

Which of the following best describes a 'zero coupon bond'?

A zero coupon bond is issued at a discount to its face value, pays no periodic interest, and is redeemed at face value on maturity. The investor's return is the gap between the discounted purchase price and the face value.

  1. AA bond that pays interest only at maturity along with the principal at a higher rate
  2. BA bond issued at a discount to face value that pays no periodic interest and is redeemed at face valueCorrect
  3. CA bond whose coupon is linked to an inflation index
  4. DA bond that pays coupon only if the issuer earns a profit

Explanation

A zero coupon bond makes no periodic coupon payments. The investor's return is the difference between the discounted purchase price and the face value received at maturity. Cumulative interest payments at maturity describe a different instrument, and inflation-linked and profit-linked coupons are not zero coupon features.

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