If you are a regular investor in bonds, you will have known by now that some bonds do not give out any payments as interest. These bonds pay interest only on the maturity of the instrument instead of regular payouts like other bonds. Hence, they are called as Zero-Coupon Bonds. In every zero-coupon bond, interest accrues annually. This accruing of interest is necessary because conventionally, the annual increase in the value of the zero-coupon bonds in question is reported as interest earned.
Zero-Coupon Bonds – Interest Accrual The procedure to record accrued interest on all zero-coupon bonds is to record in a normal way all the bond interest that accrued. What this means is that the amount that shows up as accrued amount, which is the same amount that appears in the statement issued by the broker, should record as income from bond interest.
Buying zero-coupon bonds can benefit many investors provided the investment done keeping in mind the long-term and short-term financial goals. Experts recommend investors learn about the investment products before investing to avoid disappointment. Making informed decisions can help you avoid disappointment and financial losses.
Buy Zero-Coupon Bonds
Investing in bonds has been made free from the hassle by some of the top online platforms in India. Bondsindia.com and a few more consider secure platforms online for potential trade-in bonds.
About Zero-Coupon Bonds in India
A debt instrument also known as accrual bonds is a popular bond type. In zero-coupon bonds, the issuer trades at a deep discount and does not pay coupon payments. Zero-Coupon Bonds in India do not pay interest, but they can buy at a discount on the face value. It’s a reliable source of investment for the investors interested in getting the principal along with interest at maturity.
How does it work?
These bonds guarantee not only to pay you the specified interest rate on your principal; they also guarantee to pay the same rate of interest on your interest. Zero-coupon bonds pay no periodic interest, instead of automatically reinvested. “Zeros” are the best way to lock in high-interest rates far into the future. If rates go up after buying your bond, you lock into receiving below-market interest rates. Again if you have to sell early, you will recognize a loss. Although you’ll receive no annual interest payments, the IRS will tax you as if you were.
For instance, a zero-coupon bond that has a face value of INR 20,000 issued with a maturity period of 20 years yielding interest of 5.5% might sold for a value of around INR 7000. The investor holding a zero-coupon bond will receive INR 20,000 at the maturity of twenty years later. So, here INR 13000 is the benefit. i.e., the return on investment made to buy zero-coupon bonds in India. Unlike other debt securities can trade in the secondary market.
Zero-coupon bonds is just what they call, they carry no coupon rate. Instead, you pay a decreased price now for a lump sum payout at the end. If you bought a 5-year zero-coupon bond today that will pay $1000 in 5 years, you might pay $800 today for $1000 in 5 years. The difference is you won’t receive any interest payments during those 5 years. It’s also important to note that some bonds require substantial minimum investments. You can check out the most updated rates, and investment requirements and trade these through most online brokerages just like stocks and options.
Key advantages of buying zero-coupon bonds
- This bond is often known for offering comparatively higher rates of interest.
- The income in zero-coupon bonds is predictable. These bonds if held until maturity, you are sure to receive a guaranteed return i.e., the full face value.
- Zero-coupon bonds usually issue for a long term that may extend for up to 10 to 15 years or even more.
- Zero-coupon bonds are a great investment choice if you are looking for a low-budget investment option available at a lesser risk. To conveniently buy zero-coupon bonds, click here.
Is Zero-Coupon Bond a good investment choice?
Even though zero-coupon bonds do not offer interest during their life, they can prove to be a smart investment choice due to several reasons. Let’s have a look at them:
- These bonds come with a long-term maturity date. This means that if you invest in zero-coupon bonds, you can plan for your long-term financial goals with these bonds.
- Since these bonds are available at heavy discounts, you need not shell out a huge amount of money to buy them. Even if your investment budget is small, you can buy deeply discounted zero-coupon bonds and watch your investment grow over the years till its maturity.
- Since you buy these bonds at a discounted price, they offer you a higher payment on their maturity, compared to other bonds.
- Also, as these bonds do not offer interest, there is no question of reinvesting. This does away with the reinvestment risk on these bonds, making them much safer than other investment options.
- Zero-coupon bonds are only subject to capital gain tax and the bondholders need not pay any tax on the interest as these are tax-free bonds.
How To Buy Zero-Coupon Bonds?
A dedicated account needs to be created for investors willing to invest in bonds online through trusted platforms like Bondsindia.com. These companies have facilitated KYC online. You need to enter the essential details and upload the document if required to
Complete your KYC online. Investment in bonds and your answer to the question – of how to buy zero-coupon bonds, the successful completion of KYC.
Interested investors can choose to invest in zero-coupon bonds when it issued by the government or corporates in the private and public categories. Buying bonds in India is ideal for investors planning retirement, education of children, the marriage of a child, or another long-time goal.
You can choose to invest in zero-interest bonds online in a couple of minutes. Bonds can bought through authorized banks and brokers. The periodic interest is the greatest attraction for a good percentage of the investors buying bonds. As you are aware that zero-coupon bonds do not pay interest, take your decision considering the essential factors and your aims in life. The face value in it repaid at the end of maturity.
- Brokers: You can open a Demat and Trading Account with a registered broker and buy bonds through them.
- NSE and BSE Apps: You can buy the government-issued zero-coupon bonds through the mobile or web-based apps of NSE and BSE using the services of a facilitator or aggregator.
- RBI Retail Direct Scheme: The RBI Retail Direct Scheme is a recently launched scheme by the RBI through which you can buy government-issued zero-coupon bonds.
Every bond has its pros and cons. Zero-interest bonds consider safe in comparison to equity. Some Bonds can help safeguard an investment portfolio from market volatility. It might help you diversify your portfolio and achieve your financial goals. It is better to avoid investment risks in different investment tools. For the same, you can consult an investment expert today.
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