Zero Coupon Bond

A bond that pays no coupon but is issued at a deep discount to face value. The difference between the issue and redemption prices creates a capital gain that boosts the effective yield close to market levels. As it does not pay a coupon investors do not run the risk of reinvesting interest paid at a lower rate if interest rates fall during the life of the bond. Also, there may be tax advantages to an investor from taking a one-off capital gain rather than a stream of income from coupon payments.

See also: Vanilla Bond, Bullet Bond, Samurai Bond, Shogun Bond, Yankee Bond