Zero-coupon bonds receive interest like regular bonds, except the interest is paid in one sum at the end of the bond’s maturity rather than semiannual payments during the duration of the bond. 

While the bond is outstanding the interest payments add to what is called the “accreted value”, which represents the cumulative amount of interest + principal of the bond at that time. Accreted value is the total amount owed to you by the bond issuer at any given time, and is different from the market price of the security.

Zero coupon bonds are usually sold at a substantial discount from the face amount. For instance, an investor may purchase a $2,000 zero-coupon bond with a 5.5% yield and a maturity of 20 years for roughly $675. At the end of the 20 years, the investor will receive $2,000. The difference between $2,000 and $675 represents the interest that compounds automatically until the bond matures.

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