Deep Discount Bonds vs. Zero Coupon Bonds Explained

If you’ve ever browsed through bond options, you’ve probably come across terms like deep discount bonds and zero coupon bonds. At first glance, they might seem similar—they don’t offer regular interest payments, and both are sold at a price lower than their face value.

These bonds are often preferred by investors who want to lock in a fixed return without tracking interest payouts. They’re also commonly used for long-term financial goals like retirement or children’s education.

But look a little closer, and you’ll find some key differences that matter when it comes to returns, risk, and suitability for your goals. Let’s break it down in a way that’s easy to follow, especially if you’re just starting your bond investment journey.

What is a Deep Discount Bond?

Deep discount bonds are special types of bonds. They are sold at a very low price compared to their actual value.

Let’s define deep discount bond in easy words:

A deep discount bond is a bond you buy at a much lower price than its full value. When the time comes, you get the full value back. You don’t get regular interest every year. You get all the money at the end.

Imagine a company needs money. It offers a deep discount bond. You buy it for ₹2,700 today. The company says, “After 25 years, we’ll give you ₹1,00,000.” You didn’t get anything in between, but when 25 years are over, you get ₹1 lakh. That’s a big profit!

This is the deep discount bonds meaning in simple terms — buy low, wait long, get the full amount later.

What is a Zero Coupon Bond?

Zero coupon bonds are very similar to deep discount bonds. Let’s look at the zero coupon bond definition:

A zero coupon bond is a bond you buy at a discount and get full money at maturity, but it gives no interest in between.

Suppose you buy a zero coupon bond for ₹800. After 10 years, the government gives you ₹1,000. No money in between. You just wait and get the full value in one shot.

So, zero coupon bond is like a savings bond with no regular income, but a big return later.

Key Differences – Deep Discount Bonds vs. Zero Coupon Bonds

Let’s understand the deep discount bonds vs. zero coupon bonds better with simple points:

How Do You Earn from These Bonds?

You earn by getting back more money than what you paid.

To calculate this, investors use something called the yield to maturity formula.

Here’s the simple version of the idea:

Yield to Maturity (YTM) means how much you will earn from the bond if you hold it until the end.

For instance:

• You buy a bond for ₹5,000.
• After 10 years, you get ₹10,000.
• You made ₹5,000 extra.
• The YTM shows how much % return you made every year.

Even though you didn’t get money each year, you still made a profit. That’s what YTM tells you.

Why Do Companies and Governments Issue These Bonds?

There are a few practical reasons behind it:

• The first key reason is that issuers want to avoid the hassle of making annual interest payments. By opting for a lump-sum repayment at maturity, they simplify their cash flow management—an advantage especially useful for funding long-term infrastructure or expansion projects.
• Second, they want to raise money now—whether it’s for infrastructure, expansion, or other major expenses—and they agree to pay it back after several years in one go.
• It’s also more cost-effective for them. Since deep discount bonds and zero coupon bonds are issued at a lower price than their face value, the issuer saves on annual interest costs. They get access to funds upfront without ongoing liabilities, which can be especially useful when interest rates are high.
• In short, it’s a win-win: the issuer manages costs better, and the investor gets a predictable lump sum return at maturity.

Are These Bonds Safe?

It depends on who is giving you the bond.

• Government bonds or RBI savings bonds are usually very safe.
• Bonds from private companies may carry higher risk. If the company does badly, you may not get your money back.

So always check:

• Who is issuing the bond?
• What is the bond credit rating?
• Is there a call option (which means the company can return your money early)?

Bondbazaar – Making Bonds Easy for You

Bondbazaar is a trusted place where you can buy and sell bonds online, including deep discount and zero coupon bonds. It connects directly to NSE and BSE (just like stocks), making bond investing very simple for Indian investors.

• Fixed Returns: Earn 8–14% fixed returns without market ups and downs.
• Liquidity: You can sell your bonds anytime. Other platforms don’t let you do that easily.
• Wide Choices: Access over 10,000+ bonds, including government bonds, corporate bonds, and RBI savings bonds.
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Whether you are looking for safe options like zero coupon bonds or long-term high returns from deep discount bonds, Bondbazaar helps you make the right decision.

Conclusion

Both deep discount bonds and zero coupon bonds are great choices if you want to invest for the long term and get fixed, predictable returns. While they seem similar, small differences in how they’re taxed, who issues them, and whether they offer small interest or none at all can matter. Always check the risk, the time period, and who is issuing the bond. If you're looking for a trusted platform to start investing, Bondbazaar is a smart place to begin. With expert support and zero charges, investing in bonds has never been easier or safer.