Zeros Definition
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Zero-coupon bonds (the Treasury's version of zeros are known as Strips) don't pay out interest annually. Rather, they are purchased at a discount and, at maturity, all compound interest is paid and the bondholder collects the face value of the bond. However, since interest is technically earned and compounded semiannually, holders of zeros are obliged to pay taxes each year on the interest as it accrues. Many investors like to time the maturity of their zero-coupon bonds to coincide with certain anticipated expenses, such as college tuition.
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