Sort of like a balloon payment then. The investors don’t see a dime until the bond matures? Then the borrower can file bankruptcy and not pay and those bond holders are out their investment. Right???
Doesn't look too good when you're on the other side, does it?
That's why the early zeroes (or "strip bonds") sold to the public were stripped U.S. Treasury bonds. Theoretically, Treasuries have zero credit risk.
What you pointed out did happen at the end of the '80s in the junk-bond arena. The whizzes at Drexel started peddling so-called "payment in kind" junk bonds, which were essentially zeroes. Your interest payment was more junk bonds of the same issue.
Needless to say, those deals didn't end all that well.