Bonds are debt instruments that do not carry a specific rate of interest, but are issued at a heavy discount.

Bonds are a type of debt instrument that is issued by corporations, municipalities, and governments to raise capital. They are essentially IOUs that represent a promise to repay the principal amount at a future date, along with periodic interest payments.

However, not all bonds carry a specific rate of interest. Some bonds, known as zero-coupon bonds, are issued at a heavy discount to their face value and do not pay any periodic interest. Instead, the investor receives a return in the form of the difference between the purchase price and the face value of the bond when it matures.

Characteristics of zero-coupon bonds:

- No interest payments: Unlike traditional bonds, zero-coupon bonds do not make periodic interest payments to investors. Instead, the interest is accrued and paid out as a lump sum at maturity.

- Discounted issuance: Zero-coupon bonds are typically issued at a significant discount to their face value. The discount represents the implicit interest that the bondholder will earn over the life of the bond.

- Maturity date: Zero-coupon bonds have a specified maturity date, at which the bondholder will receive the face value of the bond. This is the amount that the bond was originally issued for, before the discount.

- Tax treatment: Although zero-coupon bonds do not pay periodic interest, the investor is still liable for taxes on the accrued interest each year. This is known as imputed interest, and it is taxed as ordinary income.

- Price volatility: Zero-coupon bonds are highly sensitive to changes in interest rates. Since their value is derived solely from the difference between the purchase price and the face value, any change in interest rates can have a significant impact on their market price.

Overall, zero-coupon bonds can be an attractive investment for investors looking for long-term capital appreciation, as they offer the potential for a substantial return if held until maturity. However, they also carry risks, such as interest rate risk and the possibility of default by the issuer. Therefore, investors should carefully consider their investment objectives and risk tolerance before investing in zero-coupon bonds.