The difference between a zerocoupon bond and a regular bond is that a zerocoupon bond does not pay coupons, or interest payments, to the bondholder while a typical bond does make these interest payments. The holder of a zerocoupon bond only receives the face value of the bond at maturity. The holder of a coupon paying bond receives the face value of the bond at maturity but is also paid coupons over the life of the bond.
Zerocoupon bondholders gain on the difference between what they pay for the bond and the amount they will receive at maturity. Zerocoupon bonds are purchased at a large discount, known as deep discount, to the face value of the bond. A couponpaying bond will initially trade near the price of its face value. In other words, a zerocoupon bond gains from the difference between the purchase price and the face value, while the coupon bond gains from the regular distribution of interest.
For example, imagine that you have the choices between a oneyear zerocoupon bond with a face value of $1,000, which can be purchased for $952.38 or a oneyear 5% semiannual coupon bond trading at its face value of $1,000. If you bought the zerocoupon bond for $952.38, you would receive $1,000 at maturity, which is a gain of 5% ($47.62/$952.38). If you bought the coupon bond, you would have received two coupon payments of $25 each during the year for a total of $50, which also represents a 5% gain ($50/$1,000). So in this case, no matter which bond you buy, you will get the same return, even though the source of the return is different. This is not always true, as each case is different.

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