Article

Deep Discount Bond
June 07 , 2012

Most bonds pay regular interest to the investor, in the form of half yearly payments (called coupon payments). They then pay back the principal along with the last coupon at maturity. However, in some bonds, the coupon is not paid out, but is accumulated in the bond itself; and the entire amount is paid out together at maturity. Thus, if the bond has a face value of 100 at maturity five years from now, it will quote at a lower value (a 'discount') today, to account for the coupons not yet accumulated. Such a bond is called a Deep Discount Bond or a Zero Coupon Bond.

NABARD is one Indian public sector organisation that regularly floats deep discount bonds of 10 years maturity. It will quote at a discount to the face value of 100 today, the amount of discount depending on the prevailing interest rate scenario.

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