A Zero Coupon Bond is a debt instrument that does not pay periodic interest and is issued at a discount to its face value, with the full face value paid at maturity.
A Zero Coupon Bond is a type of bond where investors do not receive regular interest payments (coupons). Instead, the bond is purchased at a price lower than its face (par) value, and the investor earns a return when the bond matures and the issuer pays the full face value.
The difference between the purchase price and the maturity value represents the investor’s earnings. Because there are no interim interest payments, zero coupon bonds are also known as deep discount bonds.
These bonds are commonly used for long-term financial goals such as retirement planning, child education, or future lump-sum needs. Since the maturity value is fixed, zero coupon bonds offer predictable returns but are sensitive to interest rate changes. In many cases, the accrued interest may be taxable annually, even though it is received at maturity.
"An investor buys a zero coupon bond with a face value of ₹1,00,000 for ₹60,000 today. After 10 years, the bond matures and the investor receives ₹1,00,000, earning ₹40,000 as return."