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Zero coupon bonds are unique fixed-income securities issued at a deep discount and redeemed at face value at maturity. They do not pay periodic interest (coupons). Instead, your return is the difference between the purchase price and the face value received at maturity.
What Are Zero-Coupon Bonds?
A zero-coupon bond (also called a deep discount bond, strip bond, or pure discount bond) is a fixed-income security that does not pay periodic interest. Instead, it is issued at a significant discount to its face value and repaid in full at maturity.
For example, a ₹1,000 face value zero-coupon bond might be issued at ₹600 today. At maturity, you receive ₹1,000 — the difference being your return.
Key points:
No periodic interest (no coupon payments)
Sold at a discount to face value
Maturity can range from short-term to 30+ years
Sensitive to interest-rate changes (high duration)
How Do Zero-Coupon Bonds Work?
Zero-coupon bonds earn returns through capital appreciation. The interest is imputed — meaning it accrues over time but is not paid out until maturity.
Example:
If you invest ₹50,000 in a 10-year zero-coupon bond at a 7% yield, you may receive ~₹1,00,000 at maturity.
Formula to calculate price:
Price=Face Value(1+r)n\text{Price} = \frac{\text{Face Value}}{(1 + r)^n}Price=(1+r)nFace Value
Where
r = yield to maturity (YTM)
n = number of years until maturity
Why Invest in Zero-Coupon Bonds?
Predictable Lump-Sum Returns
Perfect for goal-based investing (education, marriage, retirement), since you know exactly how much you'll receive at maturity.
No Reinvestment Risk
Since there are no periodic interest payments, you don't face the risk of reinvesting coupons at lower rates.
Lower Initial Investment
Buying at a discount makes them more accessible than traditional bonds.
Risks & Considerations
Interest-Rate Sensitivity:
Prices fall sharply when interest rates rise, especially for long-maturity zero-coupon bonds.
Liquidity Risk:
May be harder to sell before maturity compared to actively traded coupon bonds.
Who Should Consider Zero-Coupon Bonds?
Long-term investors with specific financial goals
Investors are comfortable with interest-rate risk in exchange for a higher certainty of a lump-sum payout
Investors in higher tax brackets who wish to pay taxes at lower rates, since the returns from the notified zero-coupon bonds are taxed as capital gains
FAQs on Zero Coupon Bonds
A zero-coupon bond is a fixed-income security issued at a deep discount and redeemed at face value at maturity, with no periodic interest payments.
They earn through capital appreciation — the difference between purchase price and maturity value.
Government-issued or high-rated corporate zero-coupon bonds are relatively safe, but market prices fluctuate with interest rates.
For non-notified bonds, accrued interest is taxable annually. For notified bonds, gains are taxed only on sale/maturity, usually at capital gains rates.
Yes, if they are listed, you can sell them on the exchange, but liquidity may be lower than that of regular coupon bonds.
The duration equals its maturity, making it more sensitive to interest-rate changes.
Investors needing regular income or those unable to handle interest-rate volatility.
Zero-coupon bonds do not pay periodic interest, but their value increases over time. In many markets, the increase in value between purchase and maturity may be taxed, either as interest income or capital gains, depending on local regulations. Always check the applicable tax rules in your country before investing.
