Zero Coupon Bonds (ZCBs) are bonds that carry a ‘zero’ coupon rate. Therefore Zero Coupon Bonds do not pay interest to the investors.
ZCBs are issued at par value and redeemed at a premium. It is this difference between the purchase price of the bonds and its redemption value i.e the premium that signifies returns for the investors.
Zero Coupon Bonds carry ‘zero’ reinvestment risk.