Zero-coupon bonds are also called deep discount bonds. They do not pay periodic interest or coupons, hence the term “zero-coupon.” In lieu of interest, zero-coupon bonds are sold for substantially less than their par or face value, then pay out their full value at maturity.
For example, if current interest rates are 5 percent, a 10-year, $5,000 zero-coupon bond may sell for $3,050. Although the bondholder will not receive any interest over the ensuing 10 years, they will receive the full $5,000 when the bond matures.
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