What is a zero coupon bond?

Zero coupon bonds are issued by the government at very low discount to par value and there isn’t any interest paid until it reaches maturity date. The name coupon means interest in financial circles and by translations it means zero periodical interest. When it reaches maturity date then the investor will receive the par value and this sum includes the interest which has accrued since issue. For example if an investor buys up a zero coupon bond lets say for five years and it costs $11.000 and when this bond reaches maturity then he will collect $19.000. The main advantages of investing in to zero coupon bonds is that people can invest small amounts and they can actually select the maturity date, this can come handy if you have certain knowledge that what kind of bill or insurance is coming in so you can pay that from this bond. There’s a negative side to it also and this is because the investor has to pay taxes on the gained interest, even though he doesn’t get the money in his hand until the bond reaches maturity date. Another negative for this type of bond that on the secondary market it’s extremely volatile, this means that if the investor is planning on selling before maturity date then he might loose money.