Since a new type of fixed-income security cropped up in 1982, it has been grabbing the attention of American investors. Zero-coupon bonds are a good alternative to consider when looking for a way to invest in your future. Many people are purchasing these bonds with retirement and education funding in mind.
Coupons are the interest paid on that particular bond.
The interest is paid in stated periodical increments. However, zero-coupon bonds, as the name implies, do not make incremental interest payments. Instead, the bond is initially purchased at a deep discount from its face value at an agreed interest rate. Interest compounds over the life of the bond, and is paid to the investor at maturity along with the initial principal amount. The difference between the purchase price and the redemption value equals the return on investment.