Key Takeaway
Zero-coupon bonds are issued at a discount and redeemed at face value , the difference is your return. A bond bought at ₹700 and redeemed at ₹1,000 after 5 years gives a 7.4% CAGR with no reinvestment risk.
700
5 Years
Annual Yield (CAGR)7.39%
Interest Profit300
Purchase Ratio70%
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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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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