Understanding Zero Coupon Bonds

Zero coupon bonds offer a unique investment strategy where they are sold at a significant discount and do not provide periodic interest payments. Instead of receiving interest throughout the bond's life, investors pay a lower upfront cost, such as 400 rupees for a bond with a face value of 1,000 rupees, and receive the full principal amount at maturity, yielding a straightforward profit. This structure eliminates reinvestment risk, as there are no interest payouts to reinvest, making these bonds a simple and hassle-free option for investors. Consequently, zero coupon bonds, including strip bonds, have gained popularity, especially among large institutional investors like insurance companies and pension funds, who prefer the predictability and stability they offer.