The difference between a zero-coupon bond and a regular bond is that a zero-coupon bond does not pay coupons, or interest payments, to the bondholder while a typical bond does make these interest payments. The holder of a zero-coupon bond only receives the face value of the bond at maturity. The holder of a coupon paying bond receives the face value of the bond at maturity but is also paid coupons over the life of the bond.
For example, imagine that you have the choices between a one-year zero-coupon bond with a face value of Rs 1,000, which can be purchased for Rs 952.38 or a one-year 5% semi-annual coupon bond trading at its face value of Rs 1,000. If you bought the zero-coupon bond for Rs 952.38, you would receive Rs 1,000 at maturity, which is a gain of 5% (Rs 47.62/Rs 952.38). If you bought the coupon bond, you would have received two coupon payments of Rs 25 each during the year for a total of Rs 50, which also represents a 5% gain (Rs 50/Rs 1,000). So in this case, no matter which bond you buy, you will get the same return, even though the source of the return is different. This is not always true, as each case is different.
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