InvestmentFinancial Glossary
Zero Coupon Bond
Definition
A bond that does not pay periodic interest (coupon) but is issued at a deep discount to its face value. The investor earns a return by buying at the discounted price and receiving the full face value at maturity. For example, a bond with a face value of Rs 1,000 might be issued at Rs 600 and mature at Rs 1,000 after 5 years.
Why It Matters
Zero coupon bonds are highly sensitive to interest rate changes due to their long effective duration. They are useful for goal-based investing since you know the exact maturity amount. Government zero coupon bonds (like STRIPS) carry no credit risk and are suitable for matching specific future liabilities such as education expenses or retirement targets.