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What are Zero coupon bonds?

Topics Covered: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

What are Zero coupon bonds?


Context:

The government has used financial innovation to recapitalise Punjab & Sind Bank by issuing the lender Rs 5,500-crore worth of non-interest bearing bonds valued at par.

  • These are special types of zero coupon bonds issued by the government after proper due diligence and these are issued at par.

What are these special type of zero coupon bonds?

  • These are “non-interest bearing, non-transferable special GOI securities”.
  • They have a maturity of 10-15 years and issued specifically to Punjab & Sind Bank.
  • These recapitalisation bonds are special types of bonds issued by the Central government specifically to a particular institution.
  • It is not tradable, it is not transferable.
  • It is held at the held-to-maturity (HTM) category of the bank as per the RBI guidelines. Since it is held to maturity, it is accounted at the face value (and) no mark-to-market will be there.

How do they differ from traditional 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.

InstaLinks:

Prelims Link:

  1. What are bonds?
  2. What are government securities?
  3. What are zero coupon bonds?
  4. About HTM category.

Mains Link:

What are Zero Coupon Bonds? Discuss their significance.

Sources: Indian Express.