A zero coupon bond is bought at a discounted price to its face value and the principal is repaid at the bond’s maturity date. Unlike conventional bonds which make semi-annual payments, zero coupon bonds do not make periodic interest payments. U.S. Treasury bills, U.S. savings bonds and any other bond that’s been stripped of its coupons are all examples of zero coupon bonds. Investors earn a return from zero coupon bonds after compounding interest is paid at maturity plus the difference between the discounted price of the zero bond and its par or redemption value.
