A debt security that does not pay periodic interest (coupon) payments but is instead issued at a significant discount to its face value and redeemed at par at maturity. The difference between the purchase price and the face value represents the investor's return. Zero coupon bonds have higher duration and therefore greater price sensitivity to interest rate changes compared to coupon-bearing bonds of the same maturity, making them popular with traders who want to express views on interest rate direction.
Example
“The trader purchased a 20-year zero coupon Treasury bond at $45 per $100 face value, locking in a yield to maturity of 4.1% if held to redemption.”