A special type of fixed coupon bonds are zero coupon bonds or simply zeros.

Unlike standard fixed coupon bonds, zero coupon bonds make no interest payments between the issuance and maturity of the bond.

In other words, these bonds pay a fixed coupon of 0%, but of course, this doesn't mean bond holders don't earn a return at all.

The return gives us the key difference. With zero coupon bonds, they are issued at a discounted price and repaid at 100% of their face value.

When they mature, the return that bond holders earn comes from the difference between the purchase price and the redemption price.

Let's say we have a 10 year zero coupon bond issued at a price of 74.51% over the bonds.

10 year term, no interest payments will be made, but at maturity, the bond holder receives the full 100% face value.

So the return for the bond holder comes from the difference between the issue price of 74.51% and the redemption price of 100%.