Advanced
Zero-Coupon Bond
A bond that pays no periodic interest and is instead issued at a deep discount to face value, with the return coming entirely from price appreciation to par at maturity.
Why it trades at a discount
With no periodic coupons to pay, a zero-coupon bond's entire return comes from the gap between its discounted purchase price and the face value paid at maturity. The wider that gap, the higher the effective annualized yield.
A note on taxation
Unlike coupon-paying bonds, the return on a zero-coupon bond typically shows up as a capital gain at maturity or sale rather than as periodic interest income. The tax treatment can differ meaningfully, so check current rules before investing.
Related terms