Zero Coupon Bonds

You know what’s a great graduation present? Getting a bond, especially one that doesn’t pay its face value for 20 years. Thanks, Grandma.

If you ever received one of those Series EE paper savings bonds at graduation, you know that the $50 on the face of that bond won’t reach its value until the date of maturity. Which could be 20 years away. And since they were zero-coupon bonds, you never receive any interest payment for the duration of the investment.

So, you put it in a box, and forget about it, until your parents move out of their old house and tell you to come pick it up. And you have to remember why you have this thing, and how it works. So, you go to Shmoop.

The way it works is simple: Grandma bought the thing at a steep discount, i.e. below its face value. The interest pays over the duration of the bond’s life. And when it reaches its maturity date, you can go to the Post Office and finally turn this bond that’s covered in ketchup and Budweiser in for a picture of Ullyses S. Grant.