If a zero-coupon bond never pays an interest coupon, how do investors earn anything?
Recall that bond investors can receive their returns in the form of a coupon yield, a capital gains yield, or both. In a “zero,” there is no current yield, and the full yield-to-maturity comes from the capital gain. Investors always purchase a zero coupon bond at a discount to its maturity value. When they sell the bond for more than they paid for it (subject to swings in market interest rates), or when they hold it to maturity and collect a maturity value greater than the purchase price of the bond, they receive their capital gains yield.