Zero Coupon bonds to recapitalise Punjab & Sind Bank 

  • IASbaba
  • December 30, 2020
  • 0
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Zero Coupon bonds to recapitalise Punjab & Sind Bank 

Part of: GS Prelims and GS-III – Economy 

In news

  • 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. 

Key takeaways 

  • 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.

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