Zero-Coupon Bonds Explained: From T-Bills to Principal Tokens
What is a zero-coupon bond?
A zero-coupon bond is a bond that pays no interest during its life. You buy it below its face value, wait, and collect the full face value at maturity — the discount at purchase is your entire return. US Treasury bills work this way, and so do Principal Tokens in DeFi.
Key takeaways
- No coupons, no payouts along the way. Your return is the gap between price and face value.
- The most familiar example is a US Treasury bill: buy at a discount, redeem at par.
- The price climbs toward face value as maturity nears; traders call it pull to par.
- A Principal Token is a zero-coupon bond rebuilt on-chain.
How does a bond pay you without paying interest?
A zero-coupon bond pays you through its price, not through interest payments: you buy it for less than it will be worth at maturity, and the discount is the yield. Buy a bond with a 1,000 face value for 970, hold it a year, redeem it for 1,000, and you earned 30 — a shade over 3%. Nothing arrived in the meantime. That silence is the product.
Regular bonds mail you interest twice a year, which sounds friendlier but complicates everything: you have to reinvest each payment, and your final return depends on the rates you reinvest at. A zero strips all of that away. One price in, one payment out, and the return is known to the cent the day you buy.
Why does the price climb as maturity approaches?
The price climbs because the waiting shrinks. A promise of 1,000 next year is worth less than a promise of 1,000 next week, so as the payout date approaches, the discount that compensated you for waiting steadily closes. The bond gets pulled to par, and at maturity, price and face value meet.
| Time to maturity | Price |
|---|---|
| 12 months | ≈ 970 |
| 6 months | ≈ 985 |
| At maturity | 1,000 (par) |
Where do zero-coupon bonds show up in crypto?
In DeFi, the zero-coupon bond reappears as the Principal Token (PT). Yield tokenization splits a yield-bearing deposit into its principal and its income; the principal half trades below par exactly like a zero, then redeems 1:1 for the underlying at maturity. The SEC’s definition transfers cleanly:
Zero coupon bonds are bonds that do not pay interest during the life of the bonds.
US Securities and Exchange Commission, investor.gov
A PT does not pay interest during its life either. Its yield went somewhere else — into a separate Yield Token that someone else can own. What remains behaves like the zero-coupon bond desks have traded for decades, except it settles on Stellar in minutes and the backing is verifiable on-chain.
What are the risks of a zero-coupon bond?
Held to maturity, a zero delivers exactly what you paid for. The risk lives in the middle: if rates rise after you buy, the market price of your bond falls, and selling early can mean selling at a loss. Zeros actually swing harder than coupon bonds here, because every unit of value sits at the far end of the timeline.
Why would anyone buy a bond that pays no interest?
Because the return is locked in and there is nothing to manage. No payments to reinvest, no reinvestment-rate gamble. Buy at the discount, hold, redeem at face value.
Are Treasury bills zero-coupon bonds?
Yes, in structure. T-bills are sold at a discount to face value and pay no coupons, which makes them the shortest-dated and most widely held zeros in the world.
Is a Principal Token really a bond?
Functionally, yes: it trades at a discount, pays nothing along the way, and redeems at full value on a known date. Legally it is a token, not a registered security — the resemblance is in the mechanics, not the paperwork.
Can a zero-coupon bond lose money?
Yes, in two ways: selling before maturity after rates have risen, or the issuer failing to pay. The on-chain equivalent of issuer failure is a smart-contract exploit, which is why audits and on-chain backing matter.