Suitable for investors targeting specific, long-term goals

ZERO-COUPON BONDS

- HIMALI PATEL

Power Finance Corporation’s public issue of zero-coupon bonds is open for subscription currently (closes on January 30).

These bonds have a tenure of 10 years and one month and offer a yield of 6.95 percent.

Zero-coupon bonds do not pay periodic interest. Issuers sell them at a discount to face value and redeem them at par on maturity, so investors earn returns entirely through price appreciation. “In zero-coupon bonds, there are no interim cash flows; the entire return is realised at maturity,” says Tushar Sharma, co-founder, Bondbay.

Lock in returns

Zero-coupon bonds offer clarity of returns. “Investors know exactly what they will receive at maturity, provided there is no default,” says Sharma. Investors can target a defined lump-sum amount on a future date. “The yield gets locked in at purchase when the bond is held till maturity” says Vishal Goenka, cofounder, Indiabonds.com.

The absence of periodic coupons eliminates reinvestment risk, which arises when investors receive payouts and must reinvest them even when prevailing rates are unattractive.

Interest rate, liquidity risk