The information provided are for general consumption only. Do not construe this as an offer/advice/research to buy/sell any securities

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Zero Coupon Bonds

Zero coupon bonds are bonds that don’t pay regular interest payments (or coupons). They are sold at a discounted price to investors and investors get the face value (also called par value) of the bond at maturity. Investors who are not looking to generate income from their bond investments can invest in zero coupon bonds to get a lumpsum payment when the bond matures.

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Showing list of 4,825 bonds

Bond name

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Coupon Rate

Payment Freq

Maturity Date

CARE
AAA
0%Never03 Aug 28
Unrated
NIFTY 50 INDEX LINKEDon Maturity09 Oct 23
Unrated
NIFTY 50 INDEX LINKEDon Maturity19 Jul 23
Unrated
0%Never30 Jun 22
Unrated
NIFTY 50 INDEX LINKEDon Maturity18 Jun 27
CRISIL
PP-MLD AA-
NIFTY 50 INDEX LINKEDon Maturity26 Apr 24
Unrated
NIFTY 50 INDEX LINKEDon Maturity10 Jun 26
ICRA
PP-MLD BBB+
10 YR GSEC LINKEDon Maturity15 Jan 23
INDIA
A-
0%Never19 Aug 23
Unrated
NIFTY 50 INDEX LINKEDon Maturity28 Oct 24
Unrated
NIFTY 50 INDEX LINKEDon Maturity25 Jul 27
BRICKWORK
BB+
14.35% IRRQuarterly02 Jul 26
CARE
WITHDRAWN
NIFTY 50 INDEX LINKEDon Maturity13 May 23
Unrated
0%Never23 Jul 31
Unrated
NIFTY 50 INDEX LINKEDon Maturity07 Oct 23
Unrated
12% IRRon Maturity23 Nov 25
Unrated
RESET RATE (REFER REMARK)Semi Annually11 Feb 36
Unrated
RESET RATE - REFER REMARKSNever10 Oct 29
Unrated
0%Never21 Mar 24
Unrated
NIFTY LINKEDon Maturity14 Mar 27
1-20 out of 4,825

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Zero Coupon Bonds in India

Bonds without coupon or interest payments are called zero coupon bonds. Simply put, these bonds don't have interim cash flows after you invest in them. You get your principal back with the profits (or losses) all at once on the maturity date.

Difference between zero coupon bonds and normal bonds

Instead of a normal bond where you pay the face value and earn regular interest payments, zero coupon bonds are sold at a discount to the face value.

The following table highlights all the major differences between zero coupon bonds and normal bonds.

  Normal bonds Zero coupon bonds
Price Face value of the bond Available at a discount to the face value of the bond
Interest Interest is paid as per the instrument description to the owner of the bond No interest is paid when the owner is holding the bond
on Maturity Principal is returned Principal is returned along with profit
Taxation Interest payments and capital gains both are taxed Since there are not interest payments, only capital gains is taxed
Volatility Relatively low Higher than normal bonds

Are zero coupon bonds a good investment?

Zero coupon bonds are excellent for investors who want to invest in Bonds but are not keen on receiving regular interest payments. Further, investing in zero coupon bonds eliminates the reinvestment risk which is the risk that you may have to invest interest payments you receive at lower interest rates if interest rates in the economy fall.

Who should not invest in zero coupon bonds?

Zero coupon bonds should be avoided by investors who are looking to generate a stable cash flow from interest payments.

NRI eligibility for zero coupon bonds

NRIs are eligible to invest in zero coupon bonds issued by governments and PSUs but not eligible for zero coupon bonds issued by private sector companies. Investing in government zero coupon bonds may have some restrictions for NRIs. Please do your due diligence before investing.

Taxability of zero coupon bonds in India

Taxation of zero coupon bonds depends on whether they are notified or non-notified.
All gains (difference between purchase price and face value) from non-notified bonds are treated as interest income and taxed at the marginal income tax rate of the investor.
On the other hand, gains from notified bonds are treated as capital gains and taxed accordingly.l gains).

Who can issue zero coupon bonds in India?

Zero coupon bonds can be issued by the government (example - treasury bills) as well as corporations/companies (from public as well as private sectors). For example, Muthoot Fincorp Limited issued a zero coupon bond under INE549K07BI5 {link to ISIN} ISIN.

Zero coupon bond rates

Zero coupon bonds are issued at various rates ranging from 3% (short term government zero coupon bonds) up to 10% (long term corporate zero coupon bonds). The rates of zero coupon bonds may vary depending up on the interest rates set by the RBI and the market.

Disadvantages of zero coupon bonds

Zero coupon bonds are subjected to risks that all bonds are subjected to. Some of them are credit default risk, duration risk, interest rate risk and liquidity risk. Apart from credit default risk, other risks can be eliminated by staying invested in the bond until maturity date.

Moreover, zero coupon bonds are more volatile than regular interest paying bonds.

Why would you buy a zero-coupon bond?

The biggest benefit of investing in zero coupon bonds is that they don’t have reinvestment risk.

Another benefit may be that not all investors are looking for regular interest payments and the regular interest payments may actually be a drag on return in a falling interest rate environment. For such investors and conditions, zero coupon bonds are perfect investments.

Why is a zero coupon bond more volatile?

Zero coupon bonds don’t pay interest to the bondholders like normal bonds. Hence, zero coupon bonds are more affected by fluctuations in the interest rates than regular interest paying bonds.

Think about it this way - the interest payments that are already made in normal bonds are not affected by a post facto change in interest rates. But since all the profit is yet to be paid in zero coupon bonds, a change in interest rates affects both, your investment as well as expected profit from a zero coupon bond.

Hence, investors who want to speculate and benefit from a fall in interest rates invest in zero coupon bonds instead of regular interest paying bonds to enjoy a bigger upside if their trade goes right.

Best zero coupon bonds in India

There are a few factors to consider when choosing the best zero coupon bonds for investment. Firstly, credit rating is important. A higher credit rating (AAA or AA) indicates that the issuer is financially healthy to repay your money.

Another factor is yield to maturity (YTM). A higher YTM indicates a higher return that you will generate on your investment. However, credit rating and YTM of a bond are inversely related. Every investor must find his balance between credit rating and YTM to identify the best zero coupon bonds for themselves or under the guidance of a professional.

You should also consider the maturity date of the bond and try to invest in a bond which has a maturity date that aligns with your investment timeline.

Still got questions? We’re here to help.

Zero coupon bonds are a type of investment where you don't receive any interest payments, unlike regular bonds. At maturity, you get back your initial investment plus any profit (or loss) you've earned over time.
Zero coupon bonds are sold at a discount to the face value of the bond. They don’t make any interest payments but rather return the face value of the bond to the bondholder. Hence, they are also sometimes called ‘deep discount bonds.’
Short-term government bonds like T-bills (Treasury bills) and CMBs (Cash Management Bills) are examples of government-issued zero coupon bonds.
If you are someone who doesn’t need a regular cash flow, you should prefer zero coupon bonds over normal bonds to eliminate the headache of what to do with the regular interest payments.

The safety of zero coupon bonds depends upon the issuer. Bonds issued by governments are generally safer than those from corporations. Additionally, safety is influenced by the holding period; if held until maturity, zero coupon bonds are considered safe. However, they are more sensitive to interest rate changes than regular bonds. Selling before maturity can be risky due to price fluctuations.

Zero coupon bonds cannot be redeemed before maturity, but you can sell them in secondary markets.
Taxation of zero coupon bonds depends on whether they are notified or non-notified. All gains (difference between purchase price and face value) from notified bonds are treated as interest income and taxed at the marginal income tax rate of the investor. On the other hand, gains from non-notified bonds are treated as capital gains and taxed at marginal income tax rate if sold within 1 year of purchase (short-term capital gains) or at 10% if sold later (long-term capital gains).
People

Invest in safer portfolio without compromising returns.

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