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Zero Coupon Default Free Security


A default free security that generates “default flow” cash flows (interest payments) over a span of certain period. By nature, the security is free from default risk, which means repayment of its principal is almost guaranteed.

An example is a zero-coupon bond that is free from default. It is a bond that accrues interest over its life. Accrued interest is only payable at the maturity date of the bond. More specifically, a zero coupon bond (or simply, zero) doesn’t pay interest during its life, but rather it is typically sold to investors at a deep discount from its face value (i.e., the amount a bond will be worth at its maturity or due date). When this bond matures, the holder will receive one lump sum equal to the initial amount paid to buy the bond plus the accrued or imputed interest.

A zero-coupon default free security is also known as a discount default-free security.



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