Zero Coupon Bond

A zero coupon bond is a fixed-income instrument that pays no periodic interest during its life. Instead, it is issued at a significant discount to its face value and redeems at full par value on maturity—the investor's return is entirely the difference between the discounted purchase price and the face value received at redemption. For example, a zero coupon bond with a face value of ₹1,000 maturing in 5 years might be issued at ₹750. Zero coupon bonds are particularly useful for investors with a specific future cash requirement—such as funding a child's education—as the maturity payout is known and certain. However, they carry high interest rate sensitivity (duration) because all cash flows occur at the end.