Zero Coupon Bond

A zero-coupon bond is a type of debt security that does not pay periodic interest (coupon) during its tenure. Instead, it is issued at a discount to its face (par) value, and the investor receives the full face value at maturity. The return on investment comes entirely from the difference between the purchase price and the face value. Key Features No Periodic Interest Unlike traditional bonds, zero-coupon bonds do not make interest payments throughout their life. Discounted Purchase Investors buy the bond at a price lower than its face value. Example: Buy at ₹7,500 for a bond with a ₹10,000 face value. Return at Maturity The interest earned is embedded in the appreciation of the bond from purchase price to face value.

Example: If the bond matures at ₹10,000, the investor earns ₹2,500 as implicit interest. Long-term Investment Typically suitable for long-term savings or investment goals, such as retirement planning or education funds. Tax Considerations In many jurisdictions, the imputed interest (difference between purchase price and face value) may be taxable annually or at maturity. Example Face Value: ₹10,000 Purchase Price: ₹7,500 Maturity Period: 5 years Interest Earned: ₹10,000 − ₹7,500 = ₹2,500 The investor pays ₹7,500 today and receives ₹10,000 at the end of 5 years, earning ₹2,500 as the effective interest.