Zero Coupon Bonds

Zero Coupon Bonds are bonds that do not have coupons attached and therefore do not pay a interest during the life of the bond. They are purchased at a discount to the maturity value.

For example, you might pay $900 today to get back $1,000 a year later. The difference between what you pay now and what you receive in the future is your return. Zero Coupon Bonds are similar in concept to savings bonds.

Zero Coupon Bonds have an accreted value (not the same as the market value) that increases in a mathematically linear fashion over the life of the bond.