Deep Discount bonds vs Zero Coupon Bonds

Deep Discount Bonds and Zero Coupon Bonds share a common feature, i,e, no periodic coupon interest payments, but differ in terms of discount size, tenure and liquidity. Choosing between the two bonds depends on the investment horizon and risk appetite of an investor and the tax implications of a bond.

What are Deep Discount Bonds

Deep Discount Bonds (DDBs) are a category of bonds that are issued at a deep discounted value. The face value is fully paid to the investors on maturity with no coupon payments. The return on deep discount bonds comes entirely from the difference between the issue price and the redemption value. The maturity period usually ranges from 10 to 30 years. Investors who are not seeking immediate returns or monthly or quarterly interest payouts can consider investing in deep discount bonds.

In 1996, IDBI had primarily issued deep discount bonds in India at a deep discounted price of Rs 2,700 with a face value of Rs 1 lakh. The bond had a maturity period of 25 years. In March 2022, IDBI exercised a call option (being a callable bond) for early redemption.

Features of Deep Discount Bonds

• These bonds are also known as zero-interest bonds due to no coupon payments during the holding period.
• It is listed on the stock exchanges and investors can sell and realise the difference between the initial investment and the market price.
• It is also considered as as high yield bond due to the substantial difference between the lower purchase bond price and face value at maturity, which offers high returns.

What are Zero Coupon Bonds

Zero-coupon bonds (ZCBs) are a category of bonds that are issued at a price lower than the face value and are repaid to bondholders at face value on their maturity dates. These bonds also do not pay any coupon payments to their investors. The National Bank for Agriculture and Rural Development (NABARD) got approval in June 2025 to issue zero-coupon bonds to raise to Rs 19,500 crore. The bond’s maturity period is 10 years, 11 months, and 13 days and can be issued on or before March 2027. 

The Government of India has not issued zero-coupon bonds since 1996. Investors seeking capital appreciation without intermediate cash flow should consider investing in zero-coupon bonds.

Features of Zero Coupon Bonds

• These bonds have long-term maturity period, usually ranging from 10 to 15 years or more.
• Bondholders benefit from compounded growth because of no periodic coupon interest payments.
• These bonds offer a fixed payout on their maturity dates, thus allowing investors to easily align their investments with their financial objectives.

Deep Discount Bonds vs Zero Coupon Bonds

All deep discount bonds can be zero-coupon bonds, but not all zero-coupon bonds can be deep discount bonds. The distinguishing factor is characterised by deeper discounts and longer maturity periods. Both deep discount bonds and zero-coupon bonds are highly sensitive to interest rate fluctuations compared to coupon-bearing bonds. Bondholders can eliminate this interest rate risk by holding these bonds till their maturity dates. Investors should consider their financial goals, tax on bonds, liquidity requirements, bond credit rating before investing in the bond market.

FAQs

Are zero-coupon bonds the same as discount bonds?

Zero-coupon bonds are also referred to as discount bonds, as they are issued at a price lower than the face value (or par value) and are repaid at face value on their maturity dates. The return to the investor would be the difference between the face value of the bond and its purchase price.

What is another name for a deep discount bond?

A deep discount bond is often closely related to zero coupon bond, but not the same. Deep discounts are issued at steep discounts and have a longer maturity period. On the other hand, zero-coupon bonds are issued at a moderate discount and have short-medium-long-term maturity periods.