Zero Coupon Gsec
A zero coupon bond is a bond that does not pay periodic interest and the interest rate is factored into the price of the bond. The bond trades at price that is lower than its face value. For example if face value is Rs 100, price will be lower than Rs 100 (for example Rs 95) to reflect the interest rate factor and on maturity of the bond, the investor gets Rs 100. Hence if you invest Rs 95, you get Rs 100 on maturity, where Rs 5 is the interest on the bond.
Zero coupon gsec is a government of India bond where there are no periodic interest payments and the interest rate is factored into the price. The zero coupon gsec trades at a price lower than face value of Rs 100 and investor gets Rs 100 on maturity. Government bonds carry no credit risk and are accepted as collateral by all lenders and also have the best liquidity in the market.
Why should you invest in zero coupon gsec?
Zero coupon gsecs offer the highest safety of principal across all investment categories. They come in maturities ranging from 6 months to over 10 years and offer a good cash flow planning investment to meet future financial objectives. They can also be highly tax efficient (check with your IT consultant for tax treatment of zero coupon gsecs)
Gsecs are also the easiest to offer as a collateral for loans. As they are highly liquid, you can sell them quickly for funds when required. They are also the most transparent in terms of pricing as all prices are available real time in the gsec trading platform of RBI.
Zero coupon secs are available in lots starting as low as Rs 10,000, going upto Rs 5 crores and above.
Who offers zero coupon secs for investors to invest
Zero coupons secs are created by banks and RBI regulated government bond dealers, also known as primary dealers (PDs). Banks and PDs follow a process called STRIP, where a regular coupon bearing Gsec is stripped into many different gsecs, each having its own maturity. A detailed note on STRIP is available here for reference.
Pricing of STRIPS
Each individual STRIP will be priced as a ZCB g-sec. The transaction price of each such STRIP can be arrived by discounting the cash flow of a particular maturity (either Coupon or Principal flow) with the agreed ZC yield for that maturity. Further, the same can be expressed as price per Rs. 100 FV of each STRIP.
Maturity Date | Yield(semi) | Price | Face Value |
15-Dec-22 | 4.25% | 94.03 | 100 |
15-Jun-23 | 4.55% | 91.57 | 100 |
15-Dec-23 | 4.95% | 88.71 | 100 |
15-Jun-24 | 5.2% | 85.98 | 100 |
12-Dec-24 | 5.45% | 83.16 | 100 |
15-Jun-25 | 5.85% | 79.75 | 100 |
INRBonds is working closely with banks and PDs to bring gsecs to retail investors, which is a high priority for both the government of India and RBI.
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