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Zero coupon bonds are financial tools through which organizations raise capital. When bonds are issued, investors purchase those bonds, effectively acting as lenders to the issuing entity. The investors earn a return when the principal and interest are paid at maturity.
Zero coupon bonds have the following basic attributes:
- Face value - The amount the bond will be worth at maturity. The face value of a Arbor bond is always $1. For example, say an investor purchases a bond at $0.83, and another investor buys the same bond later when it is $0.9. When the bond matures, both investors will receive the $1 face value of the bond.
- Maturity date - The date on which the bond will mature and the bond issuer will pay the bondholder the face value of the bond.