Zero Coupon Bond
a.k.a. Zero, Discount bond
A bond that pays no regular interest; you buy it below face value and get the full amount at maturity.
In plain English
A bond that pays no regular interest; you buy it below face value and get the full amount at maturity.
A zero coupon bond skips the regular interest payments. Instead, you buy it at a discount, say 800 dollars, and receive 1,000 dollars at maturity. The 200-dollar difference is your return.
Because all the payoff comes at the end, zero coupon bond prices are very sensitive to changes in interest rates, more so than ordinary bonds with the same maturity. Treasury bills work the same way over short periods.
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