List of Zero Coupon Bonds

Zero coupon bonds are issued by the Reserve Bank of India (RBI) on behalf of the Central Government. Only a few government organisations issue zero coupon bonds with approval from the Ministry of Finance.

Zero coupon bonds are those bonds that do not pay regular interest to the investors. The company issues the bond at a huge discount, which you will redeem at Par; the difference between the two will be the income/return of the bondholders. You can buy these bonds in both primary and secondary markets. The longer the time they choose to invest in such bonds, the more return they will generate.

These are long-term debt instruments, having a maturity of 10-15 years. You also have zero coupon bonds that are short-term. They are usually in the form of T-Bills issued by the RBI.

• These bonds do not pay any interest to the investors.
• It is issued at a deep discount.
• These bonds are traded on the stock exchanges, and the investor can sell them before maturity.
• The investor gets the face value of the bonds at the time of maturity.
• The investor earns from the difference between the price paid to get the bonds and the price received at the time of the bond's maturity.
• Suitable for investors with long-term as well as short-term investment goals.

• Varied investment horizon: These bonds suit investors with long-term and short-term investment motives.
• Less risky: These bonds are considered less risky than coupon bonds, as the investors have to buy and leave them until maturity. They do not have to worry about the coupon payments and the market fluctuations of the bonds. However, interest rate risk is inevitable if an investor opts to sell it in the secondary market.

• Period: It is only suited for long-term investment purposes. People with short-term motives cannot invest in these bonds.
• No regular income: The investor does not get a fixed, steady income from such bonds.
• Interest rate risk: The interest rates on these bonds decline with time. Due to fluctuations in the market, the yield on these bonds declines; hence, the investor suffers the interest rate risk on such bonds.
• Taxable: Gains from zero coupon bonds are subject to capital gains tax at maturity.

As the name says, zero coupon bonds have no coupon; hence, they have no current yield. Therefore, investors need to check its Yield to Maturity (YTM).

The formula to calculate the same is:

YTM = (FV/Price)1/n-1

Where,
YTM = Yield to Maturity
FV = Face Value
Price = Bond’s current market value
n = Number of years

Let's take an example to understand it better. Assume you invest in a 2-year zero coupon bond with a face value of ₹1,000 and its current market 
price being ₹970. In this case, the YTM would be 1.54%.

• Investment objective: Depending on the investment horizon, investors can invest in long-term zero-coupon bonds having a maturity of 10-15 years. However, if your target maturity is 1 year or less, then T-Bills (they are zero coupon bonds) are also available. 
• Specified planning: Investors can invest in zero coupon bonds and allocate them to their respective financial goals such as retirement, child’s education, marriage, etc.
• Diversification of portfolio: Investors preferring to diversify their portfolio get a good option to invest in zero coupon bonds.
• Risk-averse: If you plan to hold zero coupon bonds until maturity, conservative investors can invest in them. However, the safety of the principal is of utmost importance; then, they can opt for T-Bill or fixed deposits.
• Safety: These bonds are issued by government organisations with the Ministry of Finance's approval or by the RBI. RBI issues these bonds in the form of T-Bills.