A zero-coupon bond is a bond that generates no periodic interest payments and is issued at a discount from face value. All return is realized at maturity. They are also known as accrual bonds. Because they offer the entire payment at maturity, zero-coupon bonds tend to fluctuate in price much more than a coupon bond. An advantage of zero-coupon bonds is that you automatically earn the promised yield by holding the bond to maturity. A disadvantage of zero-coupon bonds and target maturity funds is that you are taxed annually on "imputed" interest which is not received until maturity.
For example, a zero coupon bond with a $2000 par value and ten years to maturity might be trading at $1200. So today you pay $1200 for a bond that will be worth $2000 in ten years.
