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Definition: Pure Discount Bond/Zero Coupon bonds
Bonds pays periodic interests to the bond holders. This periodic interest is known as coupon payments. But not all bonds pays periodic coupon payments. Such kinds of bonds are known as Pure Discount Bond/zero coupon bonds.
The holder of a pure discount bond realizes interest by buying the bond substantially below its par value (i.e. buying the bond at a discount). Interest is then paid at the maturity date, with the interest being the difference between the price paid and par value of the bond.
If an investor purchases a pure discount bond for 70 and the interest is 30. This is the difference between the par value (100) and the price paid (70).
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