Instead, the interest accrues, or builds up, and is paid in a lump sum at maturity. You buy zero-coupon bonds at deep discount , or prices far lower than par value. When the bond matures, the accrued interest and the original investment add up to the bond's par value. Bond issuers like zeros because they have an extended period to use the money they have raised without paying periodic interest. Investors like zeros because the discounted price means you can buy more bonds with the money you have to invest, and you can buy bonds of different maturities, timed to coincide with anticipated expenses, such as college tuition bills for example.
Zeros have two potential drawbacks.
They are extremely volatile in the secondary market, so you risk losing money if you need to sell before maturity. And, unless you buy tax-exempt municipal zeros, you have to pay taxes every year on the interest you would have received had it, in fact, been paid. Inc. All Rights Reserved.