Zero-coupon instrument is a general term for debt that pays no periodic interest, and the most common example, the zero-coupon bond, has its own full entry covering pricing, taxation and uses. This page explains the broader term.
A zero-coupon instrument is sold or bought for less than the amount it will repay at maturity, and the difference is the investor's return. A one-year instrument repaying $1,000 might be bought for about $952 when one-year rates are 5 per cent, because $952 grows to $1,000 at that rate. The price is simply the present value of the single final payment, and the gap between price and face value builds up over time, a process known in accounting as accretion of a discount.
The broader name is used because many short-term money market securities work the same way without being called bonds. Treasury bills and most commercial paper are issued at a discount, and long-term government bonds can be split into separate zero-coupon pieces for each payment. Analysts also use zero-coupon rates, derived from market prices, to build the discount curves used to value other instruments. Because all their value is paid at the end, zero-coupon instruments have a duration equal to their maturity and are especially sensitive to interest rate changes.