Zero coupon bonds are bonds that do not make periodic interest payments. Instead, they are sold at a deep discount from their face value, and the holder receives the full face value when the bond matures. Federal agencies, municipalities, financial institutions and corporations all issue zero coupon bonds.

STRIPS (Separate Trading of Registered Interest and Principal of Securities) is one of the most popular types of zero coupon bonds. STRIPS are created by stripping the coupons off of an existing bond and selling them separately from the bond’s principal. This creates a zero coupon bond that pays no interest but is backed by the creditworthiness of the issuer.

Municipalities sometimes issue zero coupon bonds to finance long-term projects such as infrastructure improvements or school construction. These bonds are often called “”capital appreciation bonds”” because their price rises over time as they approach maturity. Investors in these bonds typically have a higher tolerance for risk, since there is no interest income to offset any potential losses if the municipality defaults on its obligations.

Corporations also occasionally issue zero coupon bonds, usually when they are trying to raise capital quickly without incurring too much debt. Because zero coupon bonds are sold at a deep discount, they can be an attractive option for companies that need to raise money quickly but don’t want to take on too much debt. However, these bonds are also considered high-risk because there is no interest income to cushion any potential losses if the company defaults.