Difference Between Zero-Coupon Bond and Regular Bond1 min read

  • Interest / Coupon Payments – Regular bond pays interest to the bond holders, while zero coupon bond doesn’t issue such interest payments. Instead, zero coupon bond holders merely received the face value of the bond when it reaches maturity while regular bond pays bondholders interest payments throughout the live of the bond.
  • Returns – Zero coupon bond will usually have higher returns than a regular bond with the same maturity because of the shape of yield curve. The yield of the bond increases with the duration of a bond and the yield curve is said to have a positive slope. For a zero-coupon bond, the duration equal to its maturity as all the proceeds come when the bond matures whereas for a coupon bearing bond the maturity is somewhat shorter because it pays coupons prior to maturity. Hence, zero-coupon bond has higher returns.
  • Volatility – Zero coupon bonds are more volatile than coupon bonds, so speculators can use them to profit more from anticipated short-term price movements. This is because price of a zero-coupon bond will increase more than the price of a regular coupon bond when interest rate falls.