Individual Investors - Dictionary of Financial Terms

Dictionary of Financial Terms

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Zacks Investment Research

Zero-coupon bond (Zero)

Zero sum

Definitions

Zacks Investment Research

This Chicago-based company tracks changes in earnings estimates, as well as buy, sell, and hold recommendations for approximately 5,000 stocks. The information is provided by more than 3,500 financial analysts at over 210 brokerage firms.

Based on its research, Zacks compiles consensus earnings estimates, industry group reports, and company reports that are widely followed by both individual and institutional investors. The service is available to all investors by subscription.

Zero sum

A zero-sum market is one in which one investor's profit mirrors another investor's loss. For every dollar one person makes, someone else loses a dollar. Commodities and options markets are examples of zero-sum markets.

Zero-coupon bond (Zero)

These bonds are issued at a deep discount but pay no interest until they mature. You buy zeros, usually in denominations of $1,000 per bond, at prices far below par value. While you hold the bonds, say over a 10-year period, you receive no interest-hence the term zero coupon-since coupon means interest in bond terminology.

When the bond matures, you are paid the face value, including the interest that's accumulated over the intervening 10 years. For example, you may purchase a $20,000 zero-coupon bond with a six-year term for $13,500.

One advantage of zeros is that you can invest relatively small amounts up front and choose maturity dates to coincide with times you know you'll need the money-for example, when college tuition bills come due.

One drawback to zeros, however, is that taxes are due annually on the interest that accrues, even though you don't receive the actual payment until the bond matures. The exception occurs if you buy tax-exempt municipal zeros, on which no tax is due either during the term or at maturity. Another drawback is that zero-coupon bonds are very volatile in the secondary market, so if you have to sell them before maturity, you might have to sell at a loss.