Zero-Coupon Bond
A bond paying no periodic interest, issued at a discount and redeemed at face value.
Formula
Price = Face Value / (1 + Yield) raised to the number of years to maturity
Unit
₹
In depth
With no coupons to reinvest, a zero-coupon bond held to maturity delivers exactly its yield to maturity, which removes reinvestment risk entirely — the one certainty that coupon bonds cannot offer. The trade-off is maximum interest rate sensitivity: duration equals maturity, so a long-dated zero moves more in price than any coupon bond of the same maturity. This makes them the sharpest instrument for both immunising a known future liability and speculating on rates. In India, tax on the accreted discount can be payable annually even though no cash is received, which is a practical consideration.
Worked example
A ₹1,000 face value five-year zero at an 8% yield prices at 1,000 / 1.08 raised to 5 = 1,000 / 1.4693 = ₹680.58. Held to maturity it returns exactly 8% a year, with nothing to reinvest along the way.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Zero-Coupon Bond” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.