Bonds

Zero Coupon Bonds

What are Zero Coupon Bonds?
- 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.

Who issues these Bonds?
- Zero Coupon Bonds could be issued by government, private & public corporates.
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.
- Includes a maturity period of 10 to 15 years.

How to calculate yeild 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

Advantages of 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.