The bonds that do not pay any periodic interest payments, but instead these are sold at deep discounts from its face value are known as “zero coupon bonds”. These coupon bonds are bought at a discount from their value at the time of maturity. A zero coupon bond’s holder is gentled for receiving a single payment, that is usually of a specified amount of money at a future’s particular time.

Several zero coupon bonds are inflation indexed, so the amount of the money that will be paid to the bond holder is estimated to have a set amount of the purchasing power instead of a set amount of money. These zero coupon bonds may be long or short term investments. Usually, the long-term zero coupon maturity dates begin at 10 to 15 years. These bonds can be controlled until the maturity or sold on the secondary bond markets.

The maturities of the short-term zero coupon bonds are less than 1 year and these are known as bills. The broker or bank stripping the bonds, then registers and trades these zeros as the individual securities. A zero-coupon security or stripped bond is a regular coupon-paying bond without the coupons. These bonds are stripped into two parts - the coupons and the principal. “Coupons” are the interest payments, and the “residuals” are the final payments at maturity.

Zero coupon security is like a treasury bill, in this, you have to pay a specific amount in exchange for the security’s par value at a future date, and this amount is usually $1,000. The main target of a zero-coupon security is to buy low and sell high. Once your purchased bond reaches the maturity, then you will be paid with a larger amount of money.