Zero-coupon bond
A bond paying nothing until maturity. With nothing to reinvest its promised yield is actually realised, and its duration equals its maturity exactly.
Where you will meet it
Zero-coupon bond appears in 5 learning outcomes on the CFA syllabus. A few of them:
- Work out forward rates from a set of spot rates
“An investor can lock in a return over two years either by buying a two-year zero-coupon bond or by buying a one-year bond and contracting today to reinvest at a forward rate.”
- Work out, from market prices, the return implied by a bond and the growth rate implied by a stock
“For a zero-coupon bond, r is (face value / price) raised to the power 1/n, minus 1.”
- Explain the idea of valuing a fixed-income instrument so that no arbitrage is possible
“Two instruments with identical cash flows must have the same price, and any bond is worth the sum of its cash flows each valued at the spot rate for its date, which is the price of the matching zero-coupon strip.”
- Assess ways of funding one future liability with a bond portfolio
“The simplest alternative is a zero-coupon bond maturing on the date.”
Practise it
Practise zero-coupon bond until it is automatic: questions that explain every wrong option.
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