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