A bond that pays no interest and returns only face value at maturity. It sells at a discount and its price is the discounted face value.
Where you will meet it
Zero-coupon bond comes up in 17 learning outcome notes across the FRM syllabus.
A few of them:
Commodity Forwards and Futures FRM Part I · Financial markets and products
“Buy the commodity forward, and buy a zero-coupon bond that pays the forward price F at expiry, T years from now.”
Interest Rates FRM Part I · Valuation and risk models
“A spot rate, or zero rate, is the annualized yield on a zero-coupon bond that pays a single cash flow at maturity T.”
VaR Mapping FRM Part II · Market risk measurement and management
“A forward to buy foreign currency is long the foreign spot exposure, long the foreign zero-coupon bond and short the domestic zero-coupon bond.”
Trading Strategies FRM Part I · Financial markets and products
“By put-call parity, a protective put has the same payoff as a long call plus a zero-coupon bond, and a covered call the same as a short put plus a bond.”
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