Glossary · Rates & Instruments
Zero-Coupon Bond
A bond that pays no periodic interest. Issued at a deep discount to its face value and redeemed at full face value at maturity. The investor's return is the difference between the two. Treasury Bills are a common example of zero-coupon instruments.
01—What is Zero-Coupon Bond?
The definition — and what it means in practice.
A zero-coupon bond is a bond that pays no periodic interest (no coupons). Instead, it is issued at a deep discount to its face value and is redeemed at full face value on maturity. The investor’s return is the difference between the purchase price and the face value received at maturity, which effectively represents the interest earned over time.
Zero-coupon bonds matter because they simplify cash flows: you do not receive interim interest payments, so the entire return is realised at maturity. That can suit investors who want a known maturity value or who are matching a future expense. In portfolio terms, their price is typically sensitive to interest-rate moves because all cash flow is concentrated at the end, which can increase day-to-day price volatility compared with coupon-paying bonds.
If you pay Rs 90 for a bond that redeems at Rs 100 at maturity and pays no coupons, your return is the Rs 10 difference.
- No periodic interest is paid; the return comes from buying below face value and redeeming at face value.
- Your cash flow is a single payment at maturity, which makes planning easier but removes regular income.
- Prices can be more sensitive to interest-rate changes because the cash flow is concentrated at maturity.
- Treasury Bills are a common real-world example of zero-coupon instruments.
02—How zero-coupon bond works on the PSX
The Pakistan-specific rules, conventions, and numbers.
Pakistani investors most often encounter the zero-coupon concept through Treasury Bills (T-Bills), which are issued at a discount and mature at face value. In practice, you will see them discussed as part of “fixed income” or “money market” products rather than as instruments that trade like ordinary shares on the Pakistan Stock Exchange (PSX).
Even if you mainly invest in PSX-listed equities, zero-coupon instruments still influence the wider market environment because they are closely linked to prevailing interest rates. Investors commonly compare potential equity returns against available low-risk discount instruments, and that comparison can affect how shares are valued across the market.
If you access markets through a broker, you will still deal with Pakistan’s standard market plumbing for securities activity: the PSX is regulated by the Securities and Exchange Commission of Pakistan (SECP), trades clear through NCCPL, and investors hold securities electronically at the Central Depository Company (CDC).
03—Common misconceptions
Where investors most often get this wrong.
A zero-coupon bond pays no interest, so there is no return.
The return is built into the discount: you buy below face value and receive face value at maturity. The difference is the investor’s gain.
Zero-coupon bonds are always risk-free.
The “zero-coupon” feature only describes the cash-flow structure. Credit risk depends on the issuer, and market prices can still move with interest rates.
A zero-coupon bond is the same as a dividend-free share.
A bond is a debt instrument with a stated maturity and redemption value. A share has no maturity and returns depend on business performance and market pricing.
04—Using zero-coupon bond on BSL
Where this term shows up across the platform — with live data.
- Learn the basics of fixed-income instruments in our glossary.
- Compare listed companies and sectors while thinking about rate-sensitive valuations using sectors.
- Track broad market benchmarks that may react to changing rate expectations via the KSE-100 index.
- Explore equity candidates alongside your fixed-income view using the stock screener.
05—Frequently asked questions
What investors ask about zero-coupon bond on the PSX.
Frequently Asked Questions
A zero-coupon bond is a bond that pays no periodic interest and is issued below face value, then redeemed at face value at maturity. In Pakistan, Treasury Bills are a common example of a zero-coupon instrument.
You earn the difference between what you paid and the face value you receive at maturity. There are no interim coupon payments, so the return is realised when the bond matures (or earlier if you sell it at a higher price).
Yes. Treasury Bills are commonly structured as zero-coupon instruments: they are sold at a discount and redeemed at face value on maturity, so the investor’s return is the discount.
A zero-coupon bond’s value depends on how the market discounts its single maturity payment. When interest rates change, the present value of that maturity amount changes, which can move prices.
No. Zero-coupon bonds do not pay periodic interest. Unlike shares that may pay cash dividends, a zero-coupon bond’s cash flow is concentrated in the single redemption payment at maturity.
06—Related terms
Keep building the picture.
A fixed-income instrument representing a loan made by an investor to a borrower, typically a government or corporation. The borrower pays periodic interest and repays the principal at maturity.
A short-term government debt instrument issued by the Government of Pakistan, with maturities of 3, 6, or 12 months. Sold at a discount to face value, with the return being the difference between the purchase price and the amount received at maturity. Considered one of the safest investments in Pakistan.
Securities that pay a fixed return over a defined period, such as bonds or government securities. Generally considered lower risk than equities.
The income generated by an investment over a period, expressed as a percentage of the investment's cost or current market value. Dividend yield and bond yield are the most commonly referenced forms.
The total return an investor would earn on a bond if held until its maturity date, accounting for all coupon payments and the difference between the purchase price and face value. The most comprehensive measure of a bond's return.
The benchmark interest rate at which banks in Pakistan lend to each other on a short-term basis. Published daily by the SBP and widely used as a reference rate for corporate loans, floating-rate bonds, and other financial instruments.
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