Bonds that are bought at a deep discount and pay no rate of interest are known as zero coupon bonds. These securities will mature at a larger face value than the price it was bought at.

These investments offer growth within a bond, but they do not offer any current income. These can be found in funds and annuities, since many of those assets are long term.

Taxation

Tax is normally paid each year on the earned interest from zero coupon bonds. This is also known as phantom income, so there is no taxation advantage to them unless they are bought into an IRA or other tax deferred account.

Investment Risks

Fiixed income investments and bonds that do not have a coupons or nominal yields have little or no reinvestment risk. The term reinvestment risk refers to an investor having to deposit or invest their interest payments received from other securities. When interest rates are low, this risk can be amplified. However with 0 coupon bonds - that issue is minimized by the fact that no payments are received until maturity. Since Zeros are usually longer term - this risk is even less realized.

Treasury STRIPS are also Zero coupons. T Strips are Government guaranteed bonds that have no interest paid until the end. Also municipalities and corporations offer them.

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