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Simple English definitions for legal terms
zero-coupon security
Read a random definition: mortgage-backed security
A quick definition of zero-coupon security:
A zero-coupon security is a type of investment where the investor buys the security at a discounted price and receives the full value of the security at maturity. Unlike other investments, zero-coupon securities do not pay interest during the investment period. Instead, the investor earns a profit by buying the security at a lower price and receiving the full value at maturity.
A more thorough explanation:
A zero-coupon security is a type of investment that does not pay interest or dividends. Instead, it is sold at a discount to its face value and then redeemed for the full face value at maturity.
For example, let's say you buy a zero-coupon bond for $800 that will mature in 10 years for $1,000. You don't receive any interest payments during those 10 years, but when the bond matures, you will receive the full $1,000.
Zero-coupon securities are often used by investors who want to lock in a specific return at a future date. They are also popular for retirement planning because they can be purchased at a discount and then redeemed for their full value when the investor needs the money.