Zero Coupon Bonds
A zero coupon bond is a type of bond that pays no periodic interest at all. Instead of receiving regular "coupon" payments every six months or year like a normal bond, the buyer purchases it at a price well below its face value and then receives the full face value when the bond matures. The gain between what you paid and what you get back at maturity is effectively the interest, all delivered in one lump sum at the end rather than in installments along the way.
The word "coupon" here is a holdover from when bonds were paper certificates with physical coupons attached that you would clip and redeem for each interest payment. A zero coupon bond has no coupons to clip, hence the name. So if a bond has a face value of 1,000 and is sold today for 700, and it matures in ten years, you pay 700 now and receive 1,000 in ten years, with no cash flow in between.
The nuance that trips people up is the difference between the stated face value and the actual return. Because you never see a payment until maturity, it is easy to mistake the face value for the size of your gain, when really the gain is the discount you got at purchase. The deeper the discount and the longer the time to maturity, the more the price behaves like a lever: zero coupon bond prices move much more sharply than regular bonds when interest rates change, because all the value is locked into that single future payment and there are no interim coupons cushioning the present value calculation.
Another wrinkle, particularly in the US, is that some zero coupon bonds require you to pay tax each year on the interest you are theoretically accruing, even though you have not actually received any cash yet. This is sometimes called "phantom income" and the exact tax treatment depends on the type of bond and jurisdiction.
This term depends on a rule or threshold that changes over time, so no specific figure is quoted here. The definition avoids specific tax rules, but if TrueTrader wants to mention 'phantom income' tax treatment for zero coupon bonds, that should be confirmed against current IRS (or relevant national tax authority) guidance, since imputed interest tax rules can change and vary by bond type (e.g., Treasury STRIPS vs corporate zeros vs municipal zeros).
Day traders mostly encounter zero coupon bonds indirectly, through their outsized sensitivity to interest rate moves, which makes related instruments like zero coupon bond futures or STRIPS useful proxies for pure rate bets without coupon reinvestment noise.
Suppose a zero coupon bond with a 1,000 face value and 20 years to maturity is trading at 300. You buy it for 300 and receive no payments for two decades, then collect 1,000 at maturity. If interest rates fall shortly after you buy it, the price of that bond can jump noticeably more than a coupon-paying bond of the same maturity would, because its entire value depends on discounting that single distant payment.
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