Zero-Coupon Bond Issuance Prices and Negative Yields

Summary

A zero-coupon bond makes a single payment of face value at maturity and has no interim coupon payments. Its issue price reflects the present value of that future payment. With a positive yield, discounting makes the issue price lower than par; the discussion therefore corrects the intuition that the bond might be issued at face value.

The answers add an important qualification: if the yield is negative, the issue price can be above par. This makes the below-par rule conditional on yield rather than universal. The document gives a basic pricing explanation but does not work through a present-value calculation, distinguish conventions across markets, or discuss other features that can affect issuance terms.

Key ideas

• A zero-coupon bond pays its face value in one amount at maturity.
• With a positive yield, the present value of that payment is below par.
• A negative yield can make the issue price exceed par.
• The issue price depends on the yield rather than being invariably below face value.

Tags

# How are zero-coupon bonds issued?


# How are zero-coupon bonds issued?












I am thinking of the cashflows structure of zero-coupon bonds. I am wondering whether they are usually issued below par or at par. It's more natural for me thinking that they are priced below par, but maybe I'm wrong. Thank you in advance.

## Answer by rajah9 (score 1)

https://quant.stackexchange.com/a/33308

There is only one cashflow for the zero-coupon bond. At maturity, it pays the par value.

They are always issued below par, as the buyer is paying the NPV for the bond that matures in the future.

Here is a brief reference at Investopedia.

> A zero-coupon bond, also known as an "accrual bond," is a debt security that doesn't pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value.

## Answer by Magnyz (score 1)

https://quant.stackexchange.com/a/33314

If you have a negative yield which cannot be ruled out nowadays the issueprice will be above par.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.