The difference between the initial bond price and the maturity value is amortized for tax purposes over the life of a zero-coupon bond.

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Zero-coupon bonds do not pay interest regularly, and the difference between the initial bond price and maturity value represents the interest income to the bondholder. Since this interest income is not received until the bond matures, the IRS requires that it be amortized over the life of the bond for tax purposes. This means that each year, the bondholder must report a portion of the interest income as taxable income, even though it has not yet been received.

The Difference Between the Initial Bond Price and the Maturity