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What is Zero Coupon Bond?

A zero-coupon bond is a debt instrument wherein the issuer does not make any coupon payment but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full-face value.

A zero-coupon bond will usually have higher returns than a regular bond with the same maturity because of the shape of the yield curve. It can help an investor create corpus to meet various financial goals.

Who issues these Bonds?

Zero Coupon Bonds are generally issued by government, private & public corporates.

More About Zero-Coupon Bonds

Investors often compare zero coupon bonds with other fixed income options so as to check in for minimal risks. The returns on zero coupon bonds are good enough at maturity and the option always remain to sell them in the secondary market, if the interest rates decline intensely.

Another significant feature of zero-coupon bonds is that interest income is free from taxation since the bonds are issued at a discount rate and get redeemed at face value. They only attract capital gains tax.

  • How to calculate yield maturity of a zero-coupon bonds?
    Zero coupon bonds can work to your advantage, if used judiciously and in tandem with your investment objectives. Without any intermittent coupon payments, the calculation of yield to maturity of a zero-coupon bond is as follows:
  • (Face value/ current market price) *(1/years to maturity) – 1

Features of Zero-Coupon Bond

  • The difference between the purchase price of a zero-coupon bond and the par value, indicates the investor's return.
  • Zero Coupon Bonds have no reinvestment risk however they carry interest rate risk.
  • The accumulated interest is paid at the time of maturity.
  • Includes a maturity period of 10 to 15 years.

Why invest in Zero-Coupon Bonds?

Unlike other bonds types, Zero-Coupon Bonds provides many advantages to the investors. Zero-Coupon Bonds is a good source to accumulate a fund to meet varied domestic or professional needs. It has no reinvestment risk and offers fixed returns.

Zero-Coupon Bonds are a relatively safe tool for risk-free interest income. The municipal zero-coupon bonds can help you save tax on the interest income.

Advantages of Zero-Coupon Bonds

Advantages of Zero-Coupon Bonds

Meet Long-term Goals

Zero-Coupon Bonds don’t offer regular interest. Instead, the earned interest is accumulated and paid at the maturity. It thus helps create funds that can help meet your long-term goals.

Fixed Returns

Zero-Coupon Bonds facilitates the reliable source for fixed returns provided you keep our investment until maturity. A fixed return can be earned without worrying of the market chaos.

No Reinvestment Risks

Zero-Coupon Bonds helps you avoid reinvestment risks. With Zero-Coupon Bonds there is no periodic coupon payment. It thus proves to be a useful instrument for a fixed income.

Who Should Invest in zero coupon securities?

Investing in zero coupon securities can be a good decision for many of the investors. The need is to take a wise decision after consulting an investment expert.

Zero coupon securities are ideal for investors interested in long-term investment, planning for children education or marriage, retirement, and property purchases.

Thus, zero coupon bonds in comparison to other fixed income instruments offer better return on maturity.

Choosing from the many websites the professional online platform can be a daunting task.

BondsIndia can be your trusted investment partner. Explore the different types of bonds and securities for the potential trade. Expand your knowledge and make the informed decision of buying bonds.

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Frequently Asked Questions

BondsIndia gives you many good reasons to choose it for the potential trade in bonds. Easy access, quick navigation, access to India’s biggest bonds library, secure, and hassle-free access to BondsIndia online platform.

Zero coupon bonds are considered comparatively a safe source for fixed income and good return on maturity.

Zero-coupon bond help you create corpus for long-term goals like education and marriage of children, retirement, and more.

The amount to be invested in zero coupon securities can be decided considering risk and reward capacity and other factors. Consulting an investment expert at BondsIndia is a good idea.

Zero coupon bond is subject to risk related to interest rate. Some zero-coupon bonds are also inflation indexed.

Zero coupon bond generally have the maturity period of 10, 15, or more years.

At BondsIndia, you can expand your knowledge about bonds, types of bonds, key terms used in the financial sector, and make investment decision on the basis of your knowledge.

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