A zero-coupon bond does not pay interest income and trades below its face value. An investor purchases the bond at a deep discount from its face value, and the holder ultimately receives the entire face value when the bond matures.
For example, Bob wants to purchase a zero-coupon bond with a face value of $5,000 that matures in 5 years. Bob can buy the bond for $4,000, a $1,000 discount from its face value. The bond will not make any interest income payments to Bob over the 5-year holding period. When the bond matures in 5 years, Bob will receive $5,000. Bob’s return on investment (ROI) is the $1,000 difference between his purchase price and the redemption amount.