A corporate bond that pays no interest and only promises to pay a capital amount at maturity is called what type of bond?

• A. Floating rate note
• B. Distressed
• C. Zero coupon
• D. Amortised

Answer: (C)

A bond that pays no periodic interest and only promises to pay a lump sum at maturity is called a zero-coupon bond. The essence is that there are no coupon payments along the way; you buy the bond at a discount to its maturity value and, at maturity, receive the full face value. The return comes from the gap between the purchase price and what you get at maturity, known as accretion or implied interest.

Because there are no interim cash flows, the price of a zero-coupon bond is highly sensitive to interest rate changes—the present value of the single future payoff swings a lot when rates move. This contrasts with bonds that pay coupons, whose price is less dramatically affected by rate shifts since some cash flows come earlier.

Why the other descriptions don’t fit: a floating rate note pays variable interest tied to a reference rate, not zero interest; a distressed bond describes the issuer’s credit condition rather than its payment structure; an amortised bond reduces principal gradually through periodic payments, not a single payment at maturity.

So the right description is a zero-coupon bond.