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Zero-Coupon Certificate Of Deposit (CD)

Zero-Coupon Certificate Of Deposit (CD)

What is 'Zero-Coupon Certificate Of Deposit (CD)'

A certificate of deposit (CD) that is purchased at a largely discounted rate. It differs from a traditional CD in that interest payments are not received yearly, but rather as a lump sum at the date of maturity.

Explaining 'Zero-Coupon Certificate Of Deposit (CD)'

The advantage of a zero-coupon CD is that there is no reinvestment risk, unlike with an instrument that pays interest at regular intervals. The disadvantage to investors is that even though interest is not paid annually, it is deemed to have accrued annually and is treated as the investor's taxable income, which means that tax is payable every year on the accrued interest for the term of the CD.


While the interest is not received until the maturity date of the CD, taxes must be paid on the interest every year up until the interest is actually received. Even though the price of the CD is discounted to far below par to entice purchase, strong emphasis must be placed on ensuring that the buyer will have enough money to pay the large tax bill each year.


Zero Coupon Certificate Of Deposit (cd) FAQ

What is the coupon on a CD?

“Coupon” refers to interest paid periodically. “Zero-coupon” means no interest is paid. So, you might buy a 10-year, $100,000 CD for $50,000, and you wouldn't be paid any interest over the CD term.

Can you lose your money in a CD?

CDs yield lower returns than investment accounts most times. Even the best CD rates mostly yield lower returns than investments, like stocks and bonds. This implies money can be lost, including your principal, on your investments.

Is a CD worth the investment?

CDs are generally safe for saving or investing because they are federally insured and have guaranteed returns. You'll profit more when CD rates go up.

Will CD rates go up or down in 2020?

CD is expected to go up slightly to 1.9 percent by the end of 2020, increasing rates with it. McBridge predicts that “A forecast uptick in inflation will push CD yields up slightly in the back half of the year, but it'll be a hollow victory as most increases will trail the change in inflation."

Who has the best CD rates now?

The Best 1-year CD rates for November 2020 are Ally Bank CD: 0.65% APY. Marcus by Goldman Sachs CD: 0.65% APY. First Internet Bank of Indiana CD: 0.65% APY. Comenity Direct CD: 0.60% APY. Synchrony Bank CD: 0.60% APY. Discover Bank CD: 0.60% APY. Live Oak Bank CD: 0.60% APY. CIBC Bank USA CD: 0.55% APY.

Do CDs pay dividends?

Customers with investment in CDs profits on the interest, and also receive dividends. They are a great source of consistent income. Invest in CDs that pay dividends to have a regular flow of cash.

Further Reading

An economic analysis of bank-issued market-indexed certificate of deposit–an option pricing approachAn economic analysis of bank-issued market-indexed certificate of deposit–an option pricing approach
www.inderscienceonline.com [PDF]
… certificates (stock-indexed GIC), guaranteed return index participation (GROI), or index-linked certificates of deposit … a call option.3 The payoff of $ 1 can be duplicated by a zero coupon bond with a … An economic analysis of bank-issued market-indexed certificate of deposit 199 …

The behaviour of certificate of deposit rates in the UKThe behaviour of certificate of deposit rates in the UK
academic.oup.com [PDF]
… certificates (stock-indexed GIC), guaranteed return index participation (GROI), or index-linked certificates of deposit … a call option.3 The payoff of $ 1 can be duplicated by a zero coupon bond with a … An economic analysis of bank-issued market-indexed certificate of deposit 199 …

Financial instrumentsFinancial instruments
link.springer.com [PDF]
… certificates (stock-indexed GIC), guaranteed return index participation (GROI), or index-linked certificates of deposit … a call option.3 The payoff of $ 1 can be duplicated by a zero coupon bond with a … An economic analysis of bank-issued market-indexed certificate of deposit 199 …

The design of bank-issued market-indexed certificates of deposit–survey, pricing and empirical testThe design of bank-issued market-indexed certificates of deposit–survey, pricing and empirical test
www.inderscienceonline.com [PDF]
… certificates (stock-indexed GIC), guaranteed return index participation (GROI), or index-linked certificates of deposit … a call option.3 The payoff of $ 1 can be duplicated by a zero coupon bond with a … An economic analysis of bank-issued market-indexed certificate of deposit 199 …

Structured certificates of deposit: Introduction and valuationStructured certificates of deposit: Introduction and valuation
papers.ssrn.com [PDF]
… certificates (stock-indexed GIC), guaranteed return index participation (GROI), or index-linked certificates of deposit … a call option.3 The payoff of $ 1 can be duplicated by a zero coupon bond with a … An economic analysis of bank-issued market-indexed certificate of deposit 199 …

Netherlands Deep Discount and Zero Coupon BondsNetherlands Deep Discount and Zero Coupon Bonds
heinonline.org [PDF]
… certificates (stock-indexed GIC), guaranteed return index participation (GROI), or index-linked certificates of deposit … a call option.3 The payoff of $ 1 can be duplicated by a zero coupon bond with a … An economic analysis of bank-issued market-indexed certificate of deposit 199 …


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