Why to invest in Zero Coupon Bonds in India
If you are a regular investor in bonds in India, you will definitely have known by now that there are some bonds called Zero Coupon Bonds that do not actually give out any payments as interest. If you invest in Zero Coupon bonds pay interest only on the maturity of the instrument instead of regular payouts like other Government bonds, Corporate Bonds, Tax Free Bonds, PSU Bonds, Convertible Bonds, Sovereign Gold Bonds, Perpetual Bonds, Green Bonds, Covered Bonds, State Development Loans and Market Linked Debenture . Hence, they are called as Zero Coupon Bonds. In every zero coupon bond interest rate is accrued annually. This accruing of interest is necessary, because conventionally, the annual increase in the value of the zero coupon bonds in question are 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 best bond interest rate that is accrued. What this means is that the amount that shows up as accrued amount, which is the same amount that appear in the statement issued by the broker, should be recorded as income from best bonds to buy. As the interest from bond that is being accrued is recorded, what needs to be recorded additionally is the return of capital transaction of the accrued interest, that is ploughed back to constitute increase in the value of the bond. Obviously, the amount cited under this capital transaction should equal the amount of accrued interest. However, this accounting practice has a catch - you have to record the return of capital amount as a negative value. An example will make things clearer - if buy zero coupon bond has $100 value of interest accrued, the recorded return of capital gain bond should be shown as $100. When you record the return of capital transaction, what you are doing is that you are in effect transferring the money earned from bond interest rate in India from the cash account and adding it back to the value of the bond. Through this accounting practice, the cash account shows cash balance that tallies with the zero coupon bonds online. The cash basis for zero coupon bonds is the original purchase bond and the added interest that have been accrued till date.
Zero Coupon Bonds - Creditworthiness When a person buy government bonds online from BondsIndia.com, what he essentially does is that he loans money to the Indian government. The government issues bonds that guarantee the security of the loaned amount. Zero coupon bonds India are called zeros for short are like other treasury bonds and hence have the full faith and creditworthiness of the Indian government to back it. Another name for zero coupon treasury bonds is STRIPS. STRIPs are an acronym that stands for Separate Trading of Registered Interest and Principal of Securities. Zero coupon
bonds are not considered as good investment option in india, because of the multiple interest rate fluctuation risks associated with them, the fact that there is no periodic interest payout coupled with the unfavorable income tax regulations.