My bond of interest is the Zero-Coupon Bond also known as the accrual bond. This kind of a bond does not pay interest but it is traded at a deep discount. It renders profits at maturity and it is redeemed for its full face value. Some zero coupon bonds are issued by institutions as such but others are repackaged by financial institutions.

When a Zero-Coupon Bond matures, the investor receives the lump sum value, which is equal to the initial investment plus the total interest. The maturity dates in this kind of a bond are usually long term, which allows an investor to plan for a long-range goal.

The difference between a Zero-Coupon Bond and the regular bond is that the Zero-Coupon Bond does not pay interest payments to the bondholder rather the investor receive the full face value at maturity. The holder of a regular bond receives the face value of the bond at maturity but also receives interest over the bond life. However, the Zero-Coupon Bond is purchased at a larger discounted value to the face value of the bond. A regular bond trades at a price near the face value. Generally, the Zero-Coupon Bond earns from the difference between the purchase price and the face value while a regular bond earns from the regular interests paid.

The Zero-Coupon Bond has a high Yield to Maturity (YTM). This is because the yearly interests are reinvested to be paid at maturity. For regular bonds, the interest rate is paid yearly which lowers the Yield to Maturity. The face value of a regular bond plus all the interests paid will be lower than the Yield to Maturity.

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