Zero Coupon

The basic difference between other normal bonds with coupon rate and zero coupon bonds is the coupon rate only. ZCBs carry no interest rate whereas other bonds carry some interest rate and enjoy regular income from them.


The return of a ZCB investor is long term capital gain whereas for other normal bonds it is an interest income. Normally, long-term capital gains are exempt from the tax which is a benefit for the investor. In a few countries, part of the capital gain is treated as taxable and in some others, the accrued interest is taxable. This is a disadvantage also for the ZCB investors.Zero Coupon Bond or Deep Discount Bond

Long Term in Nature

These bonds are normally long term in nature. They are a long-term investment by the investors and on the other hand, they are long term sources of finance for the issuer. Investors can best utilize such zero coupon bonds to plan for their children education, retirement etc. In essence, long-term goals of the individual can be fulfilled using such bonds. This attribute is advantageous to both the issuer and the investor.

Conservation of Cash

from the company point of view, they can preserve the cash with them in the case of ZCBs. If they would have issued normal bonds, interest payment every year would have been compulsory. For the company, these regular payments are exempt in case of ZCB issues.

No Reinvestment Risk

This feature focuses more on the investors. There is no reinvestment risk for the investors in ZCBs as they are automatically reinvested at the implied interest rate. In the case of bonds paying regular interest to the investor, they will have to again think of investing that money. They may not be able to invest at higher interest rate than the implicit interest rate of ZCBs. Without a doubt, there can be a loss of profit in the increasing interest rate regime.

Highly Fluctuation Market Prices

Market prices of zero coupon bonds are prone to higher fluctuation compared to other coupon paying bonds because they do not pay any interest during their lifetime.

High Repayment Risk

A company or government issuing zero coupon bonds is at a high risk of repayment because the amount to be paid is very huge. Effectively, the amount includes the money which they actually received from the investors at the time of issue and the compounded interest on that money. The money grows many folds because they are very long term instruments. It has an inherent risk of repayment for investors and risk of bankruptcy for the issuer company or any other body.

Last updated on : August 31st, 2017
What’s your view on this? Share it in comments below.

About The Author

Sanjay Bulaki Borad
Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of training100.ru. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

One Response

  1. Jerry Kobyluk

Leave a Reply

First Mortgage
  • Lend And Borrow Keys Showing Borrowing Or Lending On The Interne
    Difference between Hire Purchase vs. Term Loan
  • Invoice Factoring Process
    Invoice Factoring Process
  • Factoring Companies
    Factoring Companies
  • Receivable/ Invoice Factoring
    Receivables / Invoice Factoring
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Recent Posts

    Find us on Facebook

    Related pages

    debits and credits definitionimpairment losses on assetswhat is meant by payback periodresidential leaseback agreementcalculating dividends from balance sheetreceivable collection period formulaprofitability ratio analysis examplemeaning of overdraftactivity based budgeting definitionus gaap r&daverage inventory calculationwacc taxwww.investorguide.comquick assets ratiobep analysiscash conversion cycle diagramsimple definition of debit and creditirr calculation methoddefinition of debit and credit in accounting termsturnover ratio calculatorlist of indirect expenses in accountingbep break even pointtypes of financial covenantsliquidity ratio formulasequity holderdefine profit maximisationstandby letter of credit indiadepreciation tax shield formularesidual dividend formulaselling debenturesassets to sales ratiopacking loan definitionthe accounting equation explainedadvantages and disadvantages of bank loancapitalized cash flow valuationcalculating economic value addedadvantages and disadvantages of bankingwhat is economic value added evadebtors formulaliquidity ratio calculationoperating lease and finance leasehow to calculate payback period in project managementworking capital turnover ratio formulaprofitability index method of capital budgetingcredits vs debitsinterpretation of gross profit margincalculate operating leveragedividend cover definitiontypes of contingent liabilitieswhat does hypothecate meanadvantages of benchmarkingoverdraft facilitieseps earning per sharehow to calculate mirrbreak even point in unit sales formulaimport advantages and disadvantagesr&d ifrsreceivable turnover ratioaccount payable journal entrieswhat is meant by accounting equationideal ratio of debt equity ratioebitda to net incometransaction exposurelessor lessee agreementdefine debenture bondproject profitability index calculatorrationing definition economicscalculate fixed asset turnoversweat equity shares meaningdifference between managerial accounting and financial accountingdifference between financing and leasingcapital shortage definitiondefine net tangible assetscapitalize interest expense