Short answer: A zero-coupon bond is a debt instrument that pays no periodic interest. It is sold at a discount to its face value, which is the amount repaid at maturity, the date on which the issuer repays. The investor’s gain is the gap between the purchase price and that repayment amount.
Last reviewed: 8 November 2026
At a glance
| Term | What it means | Key point |
|---|---|---|
| Face value | The amount repaid at maturity | Known at purchase if the bond is held to maturity |
| Discount | Price paid below face value | The gap between price and repayment is the gain |
| Maturity | The date the issuer repays | Longer maturity means a lower purchase price |
| Reinvestment risk | Risk of reinvesting interest at a lower rate | Avoided, since there are no interest payments to reinvest |
| Inflation risk | Loss of purchasing power over time | Applies to the amount received at maturity |
| Default risk | The issuer fails to repay | High credit-rated issuers are advisable |
How does an investor earn money without interest payments?
Most conventional bonds pay interest at regular intervals, called coupons. A zero-coupon bond skips these payments entirely. The investor buys it at a price below face value and receives the full face value on the maturity date.
The return therefore comes in one piece, at the end. Nothing is paid out in between, so there is no cash flow to manage during the holding period.
Why does the purchase price depend on the time to maturity?
The longer the time to maturity, the less an investor pays for a zero-coupon bond of a given face value. This follows from the discount structure: a longer wait before repayment means a larger gap between the price and the face value.
Consider this hypothetical example, with every figure invented for illustration:
- Face value: ₹1,00,000
- Bond A, maturity in 3 years, purchase price: ₹88,000. Gap: ₹12,000.
- Bond B, maturity in 10 years, purchase price: ₹62,000. Gap: ₹38,000.
Bond B costs less today but takes seven more years to repay. Both examples are simplified and do not reflect any actual issue.
Why is the final amount predictable?
If an investor holds the bond to maturity, the amount it will pay is known at the time of purchase. Because no interest is paid along the way, the investor does not have to guess what rate each payment might be reinvested at.
This is why zero-coupon bonds are sometimes described as having a predictable outcome. The predictability applies only to the repayment amount. It does not mean the bond is free of other risks, which are covered below.
What happens to the price when interest rates change?
Zero-coupon bond prices are highly sensitive to changes in interest rates. The sensitivity rises with longer duration, a measure of how long the investor’s money stays tied up before repayment.
In practice, a bond with a longer time to maturity will generally show larger price movements when rates move. An investor who sells before maturity may receive more or less than they paid, depending on prevailing rates at the time of sale.
What are the main risks?
Zero-coupon bonds carry three main risks, and each one is a catch worth understanding.
Inflation risk. Inflation can erode the real value of the amount received at maturity. A repayment of ₹1,00,000 in ten years buys less than the same ₹1,00,000 buys today if prices rise in the meantime.
Default risk. The issuer may fail to repay face value at maturity. Because the entire return sits in that one payment, a default affects the whole investment. Choosing issuers with high credit ratings is advisable, though a high rating does not remove the risk.
Interest rate risk. As covered above, prices can fall when rates rise, especially for longer maturities. This matters most for investors who might need to sell before maturity.
Who are zero-coupon bonds suited for?
Zero-coupon bonds suit investors who need a lump sum on a known future date. Examples include saving toward retirement or a child’s education, where the timing of the cash is fixed in advance.
They are not suited to investors who need regular income. Because nothing is paid out until maturity, a zero-coupon bond cannot provide periodic cash flow. Anyone who depends on regular payments will need to look elsewhere for that income.
Frequently asked questions
Does a zero-coupon bond pay any interest?
No, it pays no periodic interest. The investor’s gain is the difference between the purchase price, which is below face value, and the amount repaid at maturity.
Can I know how much I will receive?
Yes, if the bond is held to maturity. The final amount is known at the time of purchase, though inflation can still reduce what that amount can buy.
Is a zero-coupon bond suitable if I need monthly income?
Generally not. These bonds suit investors who need a lump sum on a future date, not those who need regular income.
Is my money safe if the issuer fails to pay?
Not fully. Zero-coupon bonds carry default risk, since the issuer may fail to repay face value, so high credit-rated issuers are advisable.
Sources and last check
Facts in this article were checked against the sources below on 8 November 2026. Rules and figures can change; check the primary source before acting.
- groww.in (broker education)
- dhan.co (broker education)
- kotakneo.com (broker education)
- icicidirect.com (broker education)
- upstox.com (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.