Zero-coupon bond
A bond sold at a deep discount to its face value. It doesn't pay periodic interest payments to investors; instead, investors receive their return on investment at maturity. The return is equal to the difference between the bond's price at issuance and its face value. See "Types of Bonds."
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Zeros
Zero-coupon bonds (the Treasury's version of zeros are known as Strips) don't pay out interest annually. Rather, they are purchased at a discount and, at maturity, all compound interest is paid and the bondholder collects the face value of the bond. However, since interest is technically earned and compounded semiannually, holders of zeros are obliged to pay taxes each year on the interest as it accrues. Many investors like to time the maturity of their zero-coupon bonds to coincide with certain anticipated expenses, such as college tuition.
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