What Is a Zero-Coupon Certificate of Deposit (CD)?

What Is a Zero-Coupon Certificate of Deposit (CD)?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Have you ever wondered how a zero-coupon CD can benefit your financial portfolio? Let’s take a closer look at this unique financial instrument.

A zero-coupon CD, or Certificate of Deposit, is a type of fixed-income investment that does not pay out periodic interest payments to the investor.

Instead, it’s issued at a discounted price and, upon maturity, pays out the face value.

This difference between the purchase price and the maturity value represents the CD’s return or interest earned over its lifetime.

There are several advantages to investing in zero-coupon CDs.

Firstly, these financial products eliminate reinvestment risk since there are no periodic interest payments that need to be reinvested in potentially different market conditions.

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Additionally, they can be an attractive option for investors seeking low-risk, predictable income streams – especially for those with long-term financial goals or during periods of low-interest rates.

On the downside, zero-coupon CDs tend to have lower liquidity than traditional CDs with periodic interest payments.

Furthermore, it’s essential to remember that the interest earned on zero-coupon CDs will be subject to federal income tax, despite not being received until maturity.


A zero-coupon CD can be a valuable addition to your financial portfolio if you aim to achieve stable, long-term returns without the need to manage regular interest payments.

Key Takeaways

  • A zero-coupon CD is a fixed-income investment that pays no periodic interest but is issued at a discount and pays the face value upon maturity.
  • These investments eliminate reinvestment risk and can provide a predictable income stream for those with long-term financial goals.
  • Zero-coupon CDs may have lower liquidity than regular CDs, and the interest is subject to federal income tax, despite being received at maturity.
  • Consult a qualified financial advisor to evaluate your investment goals and risk tolerance before investing in a zero-coupon CD.

Related Questions

1. How does the pricing of zero-coupon CDs differ from regular CDs?

Zero-coupon CDs are issued at a discounted price, while regular CDs are typically issued at face value. Investors make a profit on zero-coupon CDs from the difference between the discounted purchase price and the face value paid upon maturity.

2. Can zero-coupon CDs be purchased from a bank or broker?

Yes, zero-coupon CDs can be purchased from banks or brokers that offer them for investment. It’s important to research and compare available options and understand their terms and conditions before investing.

3. Are zero-coupon CDs insured by the FDIC?

Yes, zero-coupon CDs are insured by the Federal Deposit Insurance Corporation (FDIC) up to the standard limit, which is currently $250,000 per depositor, per institution.

4. What happens when a zero-coupon CD matures?

Upon maturity, the face value of the zero-coupon CD is paid out to the investor, which represents the principal and the interest earned on the investment during its term.

5. Can an investor redeem a zero-coupon CD before its maturity?

In some cases, yes, but selling a zero-coupon CD before maturity could result in a lower return or even a loss for the investor, depending on the interest rate environment and market demand for such investments. It’s important to approach zero-coupon CDs as a long-term investment strategy.