Zero Coupon Bonds

Zero-coupon bonds (ZCB), as the name suggests, do not pay any coupon interest payments to the bondholders. These bonds are also known 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.

For instance, if you purchase a zero-coupon bond in India having a face value of Rs 20,000 at Rs 18,000, then on its maturity date, you will receive Rs 20,000, with Rs 2,000 being your returns on the bond, on the maturity date of the bond.

In this guide, you will learn how zero-coupon bonds work, their benefits, risks and how they differ from regular coupon paying bonds.

The YTM is the rate of return received if an investor purchases a bond and holds it until maturity. The formula for the calculation of your returns is mentioned below:-

YTM = (FV/PV) ^ (1 / t) – 1

‘FV’ represents the future value of the bond, ‘t’ is the number of compounding periods and ‘PV’ indicates the present value or price of the bond.

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Zero-coupon bonds in India are usually issued by corporates, especially those active in the financial sector and infrastructure sector. The Government of India has not issued zero-coupon bonds after 1996.

Interest Rate Risk

The market interest rates and bond prices are inversely related to each other. If interest rates rise, the value of the zero-coupon bond may fall. Note that the interest rate risk would be valid only for investors planning to sell their zero-coupon bonds before their maturity dates. Investors can eliminate the interest rate risk by holding these bonds till their maturity dates.

Liquidity Risk

Liquidity risk refers to the risk that an investor may not be able to find enough buyers to sell the bond in the secondary market before its maturity date. As a result, an investor may be forced to sell their zero-coupon bond at a lower price than its face value which reduces overall returns. To reduce this risk, one should invest in bonds online only after reviewing their trading volumes in the secondary market.

Credit Risk

Credit risk of a zero-coupon bond refers to the possibility of the bond issuer defaulting on its maturity repayments. Before investing, investors should check their credit ratings assigned by CRISIL, ICRA and other SEBI-registered credit rating agencies to evaluate the creditworthiness of these zero-coupon bonds.

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In June 2025, the National Bank for Agriculture and Rural Development (NABARD) got approval to issue zero coupon bonds to raise up to Rs 19,500 crore (US 2.3 billion). According to the CBDT notification 56/2025 dated 12 June 2025, the bond's maturity period is 10 years, 11 months, and 13 days. The bonds can be issued on or before March 2027.

Key Details of NABARD Zero Coupon Bonds (2025)

Other recent issuances include zero coupon bonds of Power Finance Corporation (PFC), which have a tenure of 10 years and 1 month and the public issue closes on 30 January 2026, offering 6.95% yield. In April 2025, Housing and Urban Development Corporation Ltd. (HUDCO) notified a 10-year zero-coupon bond issue of Rs 5,000 crore. 5 lakh bonds are to be issued on or before the 31st day of March 2027 of the bond. 

Zero Coupon Bonds in smaller denominations

According to SEBI Notification dated 18 December 2025, SEBI allows issuers to issue zero coupon bonds in smaller denominations of Rs 10,000 on a private placement basis - broadening participation in the corporate bond market.

Separate Trading of Registered Interest and Principal of Securities (STRIPS) is a security created by way of separating the final principal payment and the coupon payment into separate securities. These separated cash flows are then sold as individual securities and it's a way to create zero-coupon bonds. However, these bonds are created out of existing securities only and are not issued through auctions. Further, being zero-coupon bonds, STRIPS have zero reinvestment risk and are attractive to retail/non-institutional investors.

Understand with an example-

A 3 year bond with a semi-annual coupon will have 6 coupon payments and 1 principal payment. This bond can be stripped into 7 different securities and sold.