About Bonds All US Treasury bonds and notes consist of a principal obligation and semiannual coupons for the interest due on the principal. Every six months, the US Treasury pays the holder of a bond an interest payment equal to a percentage of the principal established when the bond was issued. There is one problem with the above straight US Treasury bonds. Each coupon, once detached, represents a single sum that will be due at a fixed date in the future. The detached semi-annual coupons and principal are then bundled with other coupons and principals of like maturity, and marketed to investors at a discount.
Investors receive one single payment on maturity of the zero coupon bonds.
Like any financial asset, including stocks, the value of a bond declines when interest rates increase and vice versa. As interest rates increase, the discount rate used in the discounted cash flow valuation of financial assets also increases leading to a lower present value. Zero coupon bonds are more sensitive than straight bonds to interest rate changes and will fluctuate more than straight bonds. Interest rate changes are mostly driven by the state of the economy. In an economic slowdown or deflation, interest rates will fall in order to stimulate the economy.