A zero coupon bond does not pay coupon payments but instead pays one lump sum at maturity equal to the initial investment plus the imputed interest.
Investors buy zero coupon bonds at a significant discount from their face value. For example a zero coupon bond with a face value of $100,000 and a maturity of 10 years might be bought for $50,000. At maturity the investor receives the face value.
Because of the size of the price discount to purchase the bond, an investor can put up a small amount of money today in order that they can watch the value of their investment grow over the years and reap the rewards in the future.
Zero coupon bonds often have long maturities – which means that an investor can plan to plan for a long-range goals like paying for a child’s university education or some other predictable large expense.
Whether or not a zero coupon bond makes sense for different investors depends on their own objectives as well as a range of metrics including things like the rate of inflation and the opportunity of cost of not investing in other types of interest rate securities.