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ZERO-COUPON BOND


A bond bearing zero coupon rate (i.e. no interest) sold at a price lower than

its face value. Investors book profit when they sell it (at its face value). Such bonds are popularly used by the governments to raise long-term funds. In a situation of rate cut by the RBI, zero-coupon bonds gain value-it means, they sell at hipher prices. When there is an increase in rate, the opposite happens.