A zero coupon bond unlike regular bonds do not pay interest over its life span. Instead these bonds are issued at a lower rate than their face value. At the end of the life of the bond the holder will receive the full face value of the bond. This gives the holder a capital gain on the bond at the end of its life instead of interest payment throughout its life.
Just like any capital gains many countries treat it as income and therefore is liable to be taxed accordingly.
The lifespan of a zero coupon bond is often longer that similar interest paying bonds. This makes the bond more susceptible to changes over time in the interest rate. This is best understood by looking at the time value of money concepts. If you look at the present value of a zero coupon bond and a regular bond which pays interest and consider change in the interest rate, the value of bonds can change considerably.
