Zero Coupon Bond Calculator
Yield Breakdown:
- You buy the bond at a deep discount price of ₹700.
- You receive zero yearly interest payouts during the bond tenure.
- On maturity, the bond is redeemed at par value of ₹1,000.
- Equivalent compound annual return rate: 7.39% CAGR.
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Zero Coupon Bond Annualized Yield (CAGR)
Calculates the annualized compounding yield of bonds issued at a deep discount and redeemed at face value with zero coupon payouts.
Worked Example: Buying a 5-year zero coupon bond at ₹700 (Face Value: ₹1,000)
Zero Coupon Bonds: Profiting from deep-discount fixed income
Rohan bought a 5-year zero coupon bond for ₹7,000. The bond offered zero annual interest payouts, but promised to mature at its full face value of ₹10,000.
Over the 5 years, his ₹7,000 investment grew by ₹3,000. This deep discount structure yielded an annualized compound return (CAGR) of 7.39% p.a., matching standard fixed deposits.
Zero coupon bonds do not pay annual interest; instead, they are issued at a discount and mature at par value, generating returns through capital growth.
These bonds are ideal for investors who do not need annual income payouts and want to avoid reinvestment risk during the bond tenure.
Frequently Asked Questions
How does a zero-coupon bond generate returns?
It is issued at a discounted price and redeemed at its full face value on maturity. The difference represents your interest returns.
Do zero-coupon bonds have reinvestment risk?
No. Since there are no periodic coupon interest payments to reinvest, you lock in the YTM CAGR rate for the entire tenure.
How are zero-coupon bonds taxed?
The return is taxed as capital gains when sold or redeemed, which can be tax-advantageous compared to annual interest slab rates.
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