What are Zero Coupon Bonds?
A zero coupon bond meaning, in simpler terms, is that it is a debt instrument wherein the issuer does not make any coupon payment but sells the bond at a substantial discount, offering a lucrative profit at maturity while redeeming the Bond. The Zero coupon Bonds are issued at a discount rate from their face value. The differential amount between the face value and the purchase price is the investor’s return on investment.
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More About Zero-Coupon Bonds
Investors often compare zero coupon bonds with other fixed income options so as to check in for minimal risks. The returns on zero coupon bonds are good enough at maturity and the option always remain to sell them in the secondary market, if the interest rates decline intensely.
Another significant feature of zero-coupon bonds is that interest income is free from taxation since the bonds are issued at a discount rate and get redeemed at face value. They only attract capital gains tax.
- How to calculate yield maturity of a zero-coupon bonds? Zero coupon bonds can work to your advantage, if used judiciously and in tandem with your investment objectives. Without any intermittent coupon payments, the calculation of yield to maturity of a zero-coupon bonds is as follows:
- (Face value/ current market price) *(1/years to maturity) – 1
How to Invest in Zero Coupon Bonds
Investment in Bonds can be done in a few easy steps with Quick KYC, Bond Selection and a convenient payment gateway.
1.
Complete your KYC
2.
Select your Bond
3.
Make Investment
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Features of Zero-Coupon Bonds
- Fixed maturity : The maturity date is fixed in Zero coupon bonds. The investor will only be fully redeemed at face value on the specified maturity date. Due to this, the investor finds it to be a very useful tool for long-term investing.
- Interest payments : No periodic interest payments are given to the investors in Zero coupon bonds. As well as they are sold at a discount to their face value and then redeemed at face value when they mature.
- Interest rate risk : The interest rates generally fluctuate as per the market condition, and the scenario is similar for tax-free bonds as well.
- Long-term investment : Zero coupon bonds have a fixed maturity date and are treated as long-term investment options. Because it works on the principle of longer maturity, higher interest rates, and provides a great return on investments.
Why invest in Zero-Coupon Bonds?
Zero-Coupon Bonds provide many advantages to investors. Zero-Coupon Bonds are an additional source to accumulate funds to meet varied domestic or professional needs. It has negligible reinvestment risk and offers fixed returns. Zero-Coupon Bonds are a safe tool for risk-free interest income. Municipal zero-coupon bonds can help the investor to save tax on the interest income.
Advantages of Zero-Coupon Bonds
Meet Long-term Goals
Zero-Coupon Bonds don’t offer regular interest. Instead, the earned interest is accumulated and paid at maturity. It helps the investor create funds to help meet their long-term goals.
Fixed Returns
Zero Coupon Bonds facilitate a reliable source for fixed returns, provided you keep your investment until maturity. A fixed return can be earned without worrying about market chaos.
No Reinvestment Risks
Zero Coupon Bonds help you avoid reinvestment risks. With Zero-Coupon Bonds, there is no periodic coupon payment. It thus proves to be a valuable instrument for a fixed income.
How to buy Zero coupon bonds in India?
Zero coupon bonds can be bought through two types of markets: primary and secondary. And these are the steps to buy zero-coupon bonds in India:
- Demat account: The investor must first open the Demat Account to buy zero coupon bonds. A Demat account is an electronic account that holds the investor’s securities.
- Choose the issuer: The investor should decide first whose zero-coupon bonds he/she wants to purchase. It can be decided based on the issuer’s credit rating and other financial information.
- Check on issue details: After ensuring who your issuer is, having a check on the issue details is highly important, like the face value, coupon rate and maturity date.
- Place an order: You can order with a broker like Digifinn or DP (Depository Participant) to purchase the zero coupon bonds. You can place the order either online or offline, as per the mode of payment you preferred.
- Payment: The investor needs to pay for the bonds he/she is interested in through their Demat account. The payment can be made by any means like cheque payment, net banking and NEFT/RTGS.
- Settlement: The zero-coupon bonds will be reflected in your Demat account after the required payment. The settlement for the transaction will be done as per the settlement cycle of the exchange.
Who Should Invest in zero coupon Bonds?
Investing in zero-coupon securities can be a good decision for many investors. The need is to take a wise decision after consulting an investment expert. Zero coupon securities are ideal for investors interested in long-term investment, planning for children’s education or marriage, retirement, and property purchases. Thus, compared to other fixed-income instruments, zero coupon bonds offer a better return on maturity.
More About Zero Coupon Securities in India
Zero coupon bonds are a type of bonds that do not pay you periodic interest. It trades at a deep discount and is useful for investors who are not in the need for an interest income at a fixed interval. Your investment in zero coupon securities is safe. Also, the returns you earn in this type of bond can be beyond your expectation. Let us understand with an example – what is zero coupon bonds? and how it is beneficial for you. You may be required to pay Rs. 3500 to buy a zero-coupon bonds of 20 years having face value of Rs. 10000. This 6500 is your profit/benefit that you can earn by choosing to buy the above zero-coupon bonds.
Zero coupon bonds India
Browse through our product section to learn about Zero coupon bonds India, the upcoming issues, bonds, and other news in trends. You can simultaneously explore our product section to learn more about bonds and other investment products. Do remember that a zero-coupon bonds is also termed as an accrual bond.