Zero Coupon Bonds

Bonds that do not pay interest but which are instead sold at a substantial discount to par so at maturity they return the face amount. These bonds tend to be more volatile than regular bonds, so they are best held to maturity by most investors. They are also called CATS or strips. The longer to maturity, the lower the purchase price and the greater the leverage and sensitivity to interest rates. U.S. Savings Bonds (series EE) are zero bonds sold at 50% of face value that is redeemed for face value at maturity.

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