The difference between a zero coupon bond or CD and a regular bond or CD is that a zero-coupon bond does not pay coupons, or interest payments, to the bondholder or CD holder while a typical bond and CD does make these interest payments. The holder of a zero-coupon bond or CD only receives the face value of the bond or CD at maturity. The holder of a coupon paying bond or CD receives the face value of the bond at maturity but is also paid coupons or interest over the life of the bond.

The income received form the zero-coupon bond or CD is the gain on the difference between what they pay for the bond and the amount they will receive at maturity. Zero-coupon bonds and CDs are purchased at a large discount, known as deep discount, to the face value of the bond or CD. In other words, a zero-coupon bond or CD gains from the difference between the purchase price and the face value, while the coupon bond or regular CD gains from the regular distribution of interest.

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