Zero Coupon Bonds – UPSC Prelims

Zero Coupon Bonds:
  • These are debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value.
  • The difference between the purchase price of a zero-coupon bond and the par value indicates the investor’s return.
  • For Ex. Rs 100 zero coupon bonds of 10 year maturity issued by GoI today is bought at Rs 50. When it is returned after 10 years, bearer will get Rs 100. Thus, bearer will earn a profit of Rs 50 and GoI will pay no interest.