Zero-coupon bonds offer higher return potential compared to other types of bonds because they are issued at a discount to their face value
The difference between the purchase price and the face value represents the implied interest rate
Therefore, if an investor buys a zero-coupon bond at a deep discount, the return at maturity will be much higher than the purchase price
This makes zero-coupon bonds an attractive investment option for those looking to maximize their return potential
Since zero-coupon bonds do not pay periodic interest payments, they are less exposed to interest rate risk compared to other types of bonds
Interest rate risk is the risk that the value of a bond will decrease as interest rates rise
With zero-coupon bonds, the price is determined at the time of purchase and will remain the same until maturity
Therefore, investors do not have to worry about fluctuations in interest rates affecting the value of their investment