Zero Coupon bonds to recapitalise Punjab & Sind Bank
Part of: GS Prelims and GS-III – Economy
- The government has used financial innovation of zero coupon bonds to recapitalise Punjab & Sind Bank by issuing the lender Rs 5,500-crore worth of non-interest bearing bonds.
- These are special types of zero coupon bonds issued by the government after proper due diligence and these are issued at par.
- These bonds are not tradable.
- The lender has kept them in the Held-To-Maturity (HTM) bucket, not requiring it to book any mark-to-market gains or losses from these bonds.
- Though these will earn no interest for the subscriber, market participants term it both a ‘financial illusion’ and ‘great innovation’ by the government where it is using Rs 100 to create an impact of Rs 200 in the economy.
- These bonds have a maturity of 10-15 years and issued specifically to Punjab & Sind Bank.
How do they differ from zero coupon bonds issued by private firms?
- 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.
- 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.