Glossary · Bonds and rates
Zero-coupon bond
A zero-coupon bond pays no interest along the way. You buy it for less than its face value and get the full face value at maturity.
Also called: zero, zeros, discount bond, STRIPS
At the 10-year Treasury yield of 4.98%, November 10, 2026.
At 5.35% a year: the money grows 4.9 times.
In plain words
Most bonds pay interest every six months. A zero-coupon bond pays nothing until the very end. Instead, you buy it cheap: pay $676 today, get $1,000 in 10 years. The $324 difference is your interest, all paid at once.
The discount is just compound interest run backwards: $676 growing at 4% a year becomes $1,000 in 10 years. The higher the interest rate and the longer the wait, the cheaper the bond is today.
At today’s 10-year Treasury yield of 4.98%, $1,000 due in 10 years costs about $611 (November 10, 2026).
Example
Pricing a zero
- Face value $1,000, maturity 10 years, market yield 4% a year.
- Price today = $1,000 ÷ 1.0410 = $675.56.
- After 5 years, if the yield is still 4%, it is worth $1,000 ÷ 1.045 = $821.93: its value creeps up toward $1,000.
- If instead the yield jumps to 6% the next day, the price falls to $1,000 ÷ 1.0610 = $558.39, about 17% less.
No coupons cushion the fall: zeros are the most rate-sensitive bonds of their maturity.
One level deeper
In the US, the Treasury’s STRIPS program, running since 1985, lets dealers split ordinary Treasuries into separate zero-coupon pieces, one for each interest date and one for the principal. Companies and cities sell zeros too.
Because all the money comes at the end, a zero’s Macaulay duration equals its maturity: a 30-year zero swings far more than a 30-year bond with coupons. That makes zeros useful to pension funds and insurers that must pay a known sum on a known date, and risky for anyone who may need to sell early.
In the US, the yearly growth in value of a taxable zero is taxed every year as if it were interest, even though no cash arrives until maturity (so-called phantom income). That is why zeros are often held in tax-deferred retirement accounts.
What $1,000 paid later costs today
The price today of a promise to pay $1,000 in 1 to 30 years, at the latest Treasury yields (November 10, 2026). Waiting 30 years cuts the price to about $205.
The numbers behind the chart
| Price today of $1,000 paid then | |
|---|---|
| In 1 year | $956 |
| In 2 years | $911 |
| In 5 years | $788 |
| In 10 years | $611 |
| In 20 years | $345 |
| In 30 years | $205 |
Why it matters
They show the time value of money in its purest form: today’s price of a dollar paid later.
They let savers lock in a known sum for a known date, such as college fees in 15 years.
Their prices swing the most when rates move, so traders use them to bet on interest rates.
A common mistake
Myth: A zero-coupon bond earns nothing because it pays no interest.
In fact: It earns interest by growing from its discounted price to its face value. $676 that becomes $1,000 in 10 years earned 4% a year, paid all at the end.
Questions people ask
Why buy a bond that pays no interest?
Because you know exactly what you will get and when, with no coupons to reinvest at unknown rates. That suits goals with a fixed date.
How are zero-coupon bonds taxed?
In the US, taxable zeros are taxed each year on their growth in value, even though you get no cash until maturity. Tax-free municipal zeros, and zeros held in retirement accounts, avoid that.
What are Treasury STRIPS?
Zero-coupon securities made by splitting ordinary Treasury notes and bonds into their separate payments. Each piece is a zero backed by the US government.
Read more on BigCapital
About the numbers
- The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
- US Treasury par yield curve rates: U.S. Department of the Treasury, Daily Treasury Par Yield Curve Rates (Interest Rate Statistics).
- This page explains a term. It is not investment advice.