• A zero-coupon convertible bond is a convertible bond issued by a corporation that does not pay regular interest to the bondholders.

  • Due to the zero coupon feature, these convertible bonds are sold at a discount and will instead be redeemed to face value if they are not converted before the maturity date.
  • However, zero-coupon convertible bonds prior to conversion are still favorable to investors in the event of bankruptcy, as bondholders have redemption priority over shareholders.
  • As a result, these two functions tend to balance each other in terms of risk and reward for investors, although these securities can be quite difficult to accurately evaluate.