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Zero Coupons and STRIPS
(Source: Federal Reserve Bank of New York)

Creating Zeros by Coupon Stripping (Member section)
Proliferation of Treasury STRIPS (Member section)
Part of a balanced portfolio (Member section)

• Zero coupon bonds result from the separation of coupons from the body of a security. 
• Zeros sell at deep discounts from face value. 
• The difference between the purchase price of the zero and its face value when redeemed is the investor's return.
• Zeros can be purchased from private brokers and dealers, but not from the Federal Reserve or any government agency.

The body of the stripped securities and the separate coupons are known as "zero coupons" or "zeros" because there are no periodic interest payments on each instrument. After stripping, the body and coupons are sold at a deep discount from their face values. An owner benefits only from the difference between the purchase price and the payment received upon sale or at maturity.......................

Proliferation of Treasury STRIPS
Some Treasury securities were traded in the secondary market without one or more of their interest coupons in the late 1970s. Stripped securities offered investors a financial instrument that had abundant supply, no default risk, and low incidence of being "called," or paid off, before their maturity date. However .................................

More information is provided in the Member Area

Recommended further reading:
Zero-Coupon Instruments 
Fixed Income - Zero Coupon Instruments 
Type of Instruments
Books on Financial Instruments