A zero coupon bond is a bond with no stated interest rate. Investors purchase these bonds at a considerable discount to their face value in order to earn an effective interest rate. An example of a zero coupon bond is a U.S. savings bond.
Because payments are delayed to maturity, there is a greater chance of fluctuations in the price of a zero coupon bond over its lifespan that reflect changes in interest rates.
A zero coupon convertible bond allows investors to convert to stock if the stock price reaches a level higher than its current price on the open market.