Zero coupon bonds are an attractive option for investors who seek a fixed-income investment with a low risk of default
Unlike traditional bonds that pay regular interest payments, zero coupon bonds are issued at a discount to their face value and do not pay any interest
Instead, the bondholder receives a lump sum payment at the maturity date, which includes the initial investment plus interest
While zero coupon bonds offer a predictable cash flow and a high level of safety, they are still exposed to duration risk
Duration risk is the risk associated with changes in interest rates and how they affect the price of a fixed-income security
Duration gauges how sensitively an investment’s price responds to changes in interest rates
A bond’s price decreases as interest rates increase and increases when interest rates decrease
The longer the duration of a bond, the greater the price sensitivity to interest rate changes