Zero-coupon bonds: Innovative govt tool to fund PSBs, keep the deficit in check

Zero-coupon bonds:

Source: The Indian Express

News: The government has used Zero-Coupon Bonds to recapitalize Punjab & Sind Bank by issuing the lender Rs 5,500-crore worth of non-interest bearing bonds valued at par.

Facts:

  • What are Traditional Zero-Coupon Bonds? These are debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value. The difference between the purchase price of a zero-coupon bond and the par value indicates the investor’s return.
  • What kind of Bonds are issued to Punjab & Sind Bank? These are non-interest bearing, non-transferable special Government of India(GOI) securities having a maturity of 10-15 years and issued specifically to Punjab & Sind Bank.
  • How are they different from traditional Zero-Coupon Bonds? Though zero-coupon, these bonds are different from traditional zero-coupon bonds on one account — as they are being issued at par, there is no interest; in previous cases, since they were issued at discount, they technically were interest bearing.
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