Business and Personal Finance Dictionary

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• ZERO-COUPON BOND (ZERO)
  
  These bonds are issued at a deep discount but pay no interest until they mature. You buy zeros, usually in denominations of $1,000 per bond, at prices far below par value. While you hold the bonds, say over a 10-year period, you receive no interest-hence the term zero coupon-since coupon means interest in bond terminology. When the bond matures, you are paid the face value, including the interest that's accumulated over the intervening 10 years. For example, you may purchase a $20,000 zero-coupon bond with a six-year term for $13,500. One advantage of zeros is that you can invest relatively small amounts up front and choose maturity dates to coincide with times you know you'll need the money-for example, when college tuition bills come due. One drawback to zeros, however, is that taxes are due annually on the interest that accrues, even though you don't receive the actual payment until the bond matures. The exception occurs if you buy tax-exempt municipal zeros, on which no tax is due either during the term or at maturity. Another drawback is that zero-coupon bonds are very volatile in the secondary market, so if you have to sell them before maturity, you might have to sell at a loss.
  
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