Legal Definitions - non-interest-bearing bond

A non-interest-bearing bond is a type of debt instrument that does not pay regular interest payments to the investor over its lifetime. Instead, these bonds are sold at a price lower than their face value (also known as par value or maturity value). The investor's return comes from the difference between the discounted purchase price and the full face value received when the bond matures.

Essentially, you buy it for less than it's worth today, and when it matures, you get paid its full value, with that difference being your profit.

• Example 1: Government Savings Bond for Education

  Imagine a parent purchases a special government savings bond for their child's future college education. The bond has a face value of $5,000 but is sold to the parent for $4,000. It matures in 15 years. Throughout those 15 years, the parent receives no annual or semi-annual interest payments. When the bond matures, the government pays the parent the full $5,000. This illustrates a non-interest-bearing bond because the investor's profit ($1,000) is solely derived from the difference between the purchase price and the face value at maturity, not from ongoing interest payments.

• Example 2: Corporate Funding for a Startup

  A new technology startup needs to raise capital but wants to avoid the burden of making regular cash interest payments in its early, cash-strapped years. It issues a five-year bond with a face value of $10,000, selling it to investors for $8,500. Investors buy these bonds, receiving no interest payments during the five-year period. At the end of five years, the startup repays the investors the full $10,000. This is a non-interest-bearing bond because the investors' return ($1,500) is entirely from the discount at which they bought the bond, allowing the company to defer its payment obligations until maturity.

• Example 3: Municipal Bond for Infrastructure Development

  A city council decides to fund a major new public transportation project by issuing bonds. To make the financing structure simpler and potentially more attractive to certain institutional investors, they issue 20-year bonds with a face value of $25,000, selling each for $18,000. Throughout the two decades, the bondholders do not receive any periodic interest payments from the city. Upon the bond's maturity, the city pays each bondholder the full $25,000. This demonstrates a non-interest-bearing bond because the investors' profit ($7,000) is realized only at the bond's maturity, stemming from the initial discount rather than ongoing interest income.