when the bond matures the bondholder is repaid an amount equal to the face value of the bond the par or face value of a corporate bond is typically stated as 1 000 
if a corporate bond is issued at a discount this means investors can purchase the bond below its par value for example an investor who purchases a bond for 920 at a discount will receive 1 000 when it reaches its maturity date the 80 return plus coupon payments are the investor s earnings for holding the bond but not all bonds have coupon payments those that do not are referred to as zero coupon bonds zero coupon bonds are issued at a deep discount and repay the par value at maturity the difference between the purchase price and the par value represents the investor s return the payment received by the investor is equal to the principal invested plus the interest earned compounded semiannually at a stated yield the interest earned on a zero coupon bond is an imputed interest meaning that it is an estimated interest rate for the bond and not an established interest rate for example a bond with a face value of 20 000 that matures in 20 years with a 5 5 yield may be purchased for roughly 6 855 at the end of the 20 years the investor will receive 20 000 the difference between 20 000 and 6 855 or 13 145 represents the interest that compounds automatically until the bond matures imputed interest is sometimes referred to as phantom interest the imputed interest on the bond is subject to federal income tax 23 therefore although no coupon payments are made on zero coupon bonds until maturity investors may still have to pay federal state and local income taxes on the imputed interest that accrues each year purchasing a municipal zero coupon bond buying zero coupon bonds in a tax exempt account or purchasing a corporate zero coupon bond that has tax exempt status are a few ways to avoid paying income taxes on these securities 1pricing a zero coupon bondthe price of a zero coupon bond can be calculated as price m 1 r n