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What are zero-coupon bonds?

Zero coupon bonds are issued at a discount to the face value of the bond. They do not pay interest during the tenure of the security. The investor of the zero coupon bond receives the face value of the investment on maturity. The difference between the issue price and the maturity value of the bond is the capital gain for the investor. These bonds help issuers preserve their cash. The RBI, in 2011, had cautioned that while investing in zero coupon bonds, banks should ensure the issuer builds a sinking fund for accrued interest and keeps it invested in liquid investments, after considering the credit risk involved.

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