Final answer:
A zero-coupon bond does not pay periodic interest or coupon. Instead, it is issued at a discount and investors receive the face value at maturity. The profit is the difference between the purchase price and the face value.
Step-by-step explanation:
A bond that does not pay a coupon is commonly referred to as a zero-coupon bond. These bonds are issued at a discount and do not pay periodic interest. Instead, the investor receives the face value of the bond at maturity. The difference between the purchase price and the face value at maturity represents the investor’s earnings. For example, an investor might buy a zero-coupon bond with a face value of $1,000 for $750; upon maturity, the investor is paid $1,000, and the $250 difference is the profit from the investment.
The value of a zero-coupon bond is influenced by changes in interest rates. If interest rates rise after the purchase of a zero-coupon bond, the bond's value may decrease, and if interest rates fall, the bond's value may increase. This fluctuation is a significant factor for investors to consider when purchasing these types of bonds.