One of the primary drawbacks of zero coupon bonds is that they are not suitable for all investors
These bonds are considered high-risk investments and are typically more suitable for experienced investors who have a higher tolerance for risk
The lack of periodic interest payments can make zero coupon bonds more volatile than other types of bonds, which can lead to a significant loss of capital
Another con of zero coupon bonds is that they are vulnerable to interest rate risk
As interest rates rise, the value of zero coupon bonds falls, and when interest rates fall, the value of zero coupon bonds rises
This relationship exists because zero coupon bonds have no coupon payments, so their value is entirely dependent on the face value and the time to maturity
If interest rates rise before the bond’s maturity, investors may sell their bonds at a loss
Future cash flows from the bond lose some of their buying value due to inflation