Zero coupon bond

Zero-coupon bond or ZCB is a financial instrument which does not pay any interest or coupon rate, but is, instead, issued at a deep discount and is redeemed at face value on maturity. 

The return earned by the investor is the difference between the issue price and the redemption price. 

Example

Say, a one-year ZCB with par value of Rs 100 is issued at Rs 92, which means that the investor which earn Rs 8 on the investment or 8.87 percent.

In India, mostly T-bills are issued in the form of ZCB with maturities of 91, 182, 364 days.

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As there is no coupon rate, ZCBs are safer as compared to other fixed income instruments, which are sensitive to changes in interest rates.