A zero-coupon interest rate is the rate of interest earned on an investment that is made over a given period (horizon). At the end of the period, the interest and principal are paid to the investor, as no intermediate payments would need to be made.
For example, if a 7-year zero rate (continuously compounded) is quoted as 5.5% per year, then a $1,000 invested for seven years would grow at the end of the period to:
Value at maturity = principal x e zero rate x number of years
Value at maturity = 1,000 x e 0.055 x 7
Value at maturity = $1469.61
