Zero-Coupon Bond

A zero-coupon bond makes no periodic interest payments. Instead it is issued (or trades) at a deep discount to its face value, and the investor's entire return is the difference between the discounted purchase price and the par value received at maturity. T-Bills are short-dated zeros; longer-dated Treasury STRIPS are created by separating a coupon bond's interest and principal into individually tradable zeros.

Because all cash flow arrives at a single point — maturity — a zero's duration equals its maturity exactly, giving it the highest interest-rate sensitivity of any bond at that tenor. A 30-year zero is the single most rate-sensitive Treasury instrument available; small yield moves swing its price violently.

The practical edge: zeros let investors lock in a known compound return and precisely match a future liability (a pension payout, a tuition bill). The trade-off is U.S. taxable holders owe tax on the imputed "phantom" interest each year even though no cash is received — so zeros are usually held in tax-deferred accounts.