Zero coupon bonds: Innovative government tool to fund PSBs, keep deficit in check

Context

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

What are Zero Coupon bonds?

• These are the special types of recapitalization bonds issued by the Central government specifically to a particular institution.
• The funds raised through issuance of these instruments are being deployed to capitalize the state-run bank.
• These bonds will earn no interest for the subscriber.
• These bonds are neither tradable nor transferable.
• They have a maturity of 10-15 years.
• Only those banks, whosoever is specified, can invest in them.
• It is held at the held-to-maturity (HTM) category of the bank as per the RBI guidelines.

How they are different from traditional bonds?

• They are being issued at par, there is no interest. Contrary, the traditional bonds are issued at discount, they technically are interest bearing.

How they are different from zero coupon bonds issued by private firms?

• 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.