The idea
A zero coupon bond (also called a deep discount bond) pays no coupon. You buy it below face value and receive the full face value at maturity; the gap is your return.
Working out the yield
Example: a 5-year zero coupon bond with ₹1,00,000 face value bought for ₹70,000: (1,00,000 ÷ 70,000)^(1/5) − 1 = about 7.4% a year, compounded.
Where you find them in India
- Treasury bills — the government's 91-, 182- and 364-day bills are zero coupon instruments.
- G-sec STRIPS — the RBI lets dated government securities be "stripped" into separate zero coupon pieces for each interest payment and the principal; some are available through brokers and RBI Retail Direct.
- Corporate zero coupon bonds and deep discount NCDs — issued by some companies and NBFCs, carrying the company's credit risk.
Why people use them
- You know exactly what you'll get on a date — useful for a fixed future goal like a child's fees.
- There is no coupon to reinvest, so no worry about reinvesting at lower rates.
The catch
- Price swings: with nothing paid until the end, a zero coupon bond's price moves more with interest rates than a regular bond of the same maturity. Fine if you hold to maturity; painful if you must sell early.
- Tax: the gain is generally taxed as a capital gain when you sell or at maturity; for unlisted bonds it's at your slab rate. Check the specific bond's tax treatment before buying.
- Credit risk on corporate ones: you get nothing until maturity, so a default hurts more.
For general information only, not investment advice or a recommendation. Oxon Fintech is a loan facilitation platform, not a SEBI-registered investment adviser, bank or mutual fund distributor, and does not sell bonds, deposits or funds. Rates and rules are as checked on the date above; confirm with the issuer, bank or fund house before investing. Mutual fund investments are subject to market risks; read all scheme-related documents carefully.