Banking Sector Reforms

What are Zero Coupon Bonds?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Zero-Coupon Bonds

Mains level : Banks recapitalization measures

The government has used financial innovation to recapitalize a bank by issuing the lender Rs 5,500-crore worth of non-interest bearing bonds called Zero-Coupon Bonds.

Try this PYQ:

Q.Which of the following is issued by registered foreign portfolio investors to overseas investors who want to be part of the Indian stock market without registering themselves directly?

(a) Certificate of Deposit

(b) Commercial Paper

(c) Promissory Note

(d) Participatory Note

Zero-Coupon Bonds

  • These are non-interest bearing, non-transferable special GOI securities that have a maturity of 10-15 years and are issued specifically to Punjab & Sind Bank.
  • These bonds are not tradable; the lender has kept them in the held-to-maturity (HTM) investments bucket, not requiring it to book any mark-to-market gains or losses from these bonds.
  • This will earn no interest for the subscriber; market participants term it both a ‘financial illusion’ and ‘great innovation’ by the government.

How do they differ from bonds issued by private firms?

  • There is a difference between zero-coupon bonds issued by other corporates and these.
  • Zero-coupon bonds by private companies are normally issued at discount, but since these special bonds are not tradable these can be issued at par.
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