When is interest paid on zero coupon bonds?

Zero coupon bonds are unique financial instruments that do not make periodic interest payments like traditional bonds. Instead, they are issued at a discount to their face value, and the interest is effectively accrued and paid out in a lump sum when the bond matures. This means that the investor receives the face value of the bond at maturity, which includes the accumulated interest.

The structure of zero coupon bonds allows investors to benefit from a single, tax-deferred interest payment, which can be especially attractive for those looking to avoid periodic interest payments during the life of the bond. Because these bonds do not distribute any interest until they reach maturity, they are often used in strategies where capital is not needed until a future date or event. This total payment at maturity reflects the interest earned over the life of the bond, thereby classifying this repayment structure as the correct choice.