• 9964432222
  • Mail Us
  • Appointment
  • Locate Us
  • Chat Now
  • Courses
  • Login
  • Register
Manifest IAS
JournalsOfIndia
Manifest Learning Academy
  • Home
  • SNIPPETSfor Prelims
  • ARTICLESfor Mains
  • BROWSEBY SOURCE
  • DOWNLOADS
No Result
View All Result
  • Home
  • SNIPPETSfor Prelims
  • ARTICLESfor Mains
  • BROWSEBY SOURCE
  • DOWNLOADS
No Result
View All Result
JournalsOfIndia
No Result
View All Result
Home Economy

Zero-Coupon Bonds

December 28, 2020
in Economy
Reading Time: 3 mins read
0
Zero-Coupon Bonds
261
VIEWS
Share on WhatsAppShare on TelegramShare on Facebook
image_pdfMake PDF

In news 

Recently, 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 is a Zero-coupon bond?

  • A zero coupon bond also called a deep discount is a bond in which the face value is repaid at the time of maturity. That definition assumes a positive time value of money. 
  • It does not make periodic interest payments or have so-called coupons, hence the term zero coupon bond
  • When the bond reaches maturity, its investor receives its par (or face) value.

More about recent innovation by the government

  • Funds raised through issuance of these instruments, which are a variation of the recapitalisation bonds issued earlier to public sector banks, are being deployed to capitalise the state-run bank.
  • 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.
  • According to MD & CEO of Punjab and Sind bank, these are special types of zero coupon bonds issued by the government after proper due diligence and these are issued at par.
  • As these bonds are not tradable, the lender has kept them in the HTM bucket, not requiring it to book any mark-to-market gains or losses from these bonds.

Why did the government use this innovative tool?

As per Financial market participants, government seems to have found an innovative way to capitalise banks, which does not affect the fiscal deficit while at the same time provides much needed equity capital to the banks

How are Zero coupon bonds different from other recapitalization bonds?

    • Unlike the previous tranches of recapitalization bonds which carried interest and were sold to different banks, these “non-interest bearing, non-transferable special GOI securities” have a maturity of 10-15 years and issued specifically to Punjab & Sind Bank.
  • These recapitalization bonds are special types of bonds issued by the Central government specifically to a particular institution. 
  • 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.
  • Only those banks, whosoever is specified, can invest in them, nobody else andand it is for a specified period
  • 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. 
The investment portfolio of banks is classified under held to maturity (HTM), available for sale (AFS) and held for trading (HFT) category. The holding of securities under HTM provides cushion for banks from valuation changes.
  • 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.
  • According to Finance ministry, these are instruments which are a variation of the recap bonds but effectively meet the same purpose, and these are issued in conformity with the RBI guidelines

Difference between zero coupon bonds issued by private firms and special zero coupon bonds by the government

  • 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
  • The special bonds are issued to a specified person

Does it solve the problems faced by Banks?

  • According to market participants, the innovative move by the government may not be a permanent solution for the banking sector’s problems.
  • They also state that it doesn’t solve the problem permanently but gives you more time to solve it.
image_pdfMake PDF
Source: The Indian Express
Tags: Prelims

Related Posts

What is short selling?

What is short selling?

January 28, 2023
The trade-plus-one(T+1) settlement plan

The trade-plus-one(T+1) settlement plan

January 27, 2023
SEBI’s information database on municipal bonds

SEBI’s information database on municipal bonds

January 25, 2023
Caller Name Presentation (CNAP) proposal by TRAI

Caller Name Presentation (CNAP) proposal by TRAI

January 20, 2023
Oxfam Report -‘Survival of the Richest’

Oxfam Report -‘Survival of the Richest’

January 19, 2023
Draft National Retail Trade Policy

Draft National Retail Trade Policy

January 19, 2023
World Social Report 2023

World Social Report 2023

January 18, 2023
Indian Railways deal with Siemens for high horsepower engines

Indian Railways deal with Siemens for high horsepower engines

January 18, 2023
Coal Ministry relaxation in Performance Bank Guarantee

Coal Ministry relaxation in Performance Bank Guarantee

January 17, 2023
New Umbrella Entity

New Umbrella Entity

January 9, 2023
Please login to join discussion

Our Offline Classroom Student

CONGRATULATIONS TO 2021 TOPPERS !!!

Rank 171 Kumar Shivashish
Rank 250 Sahithya
Rank 263 Sumit Kumar Thakur
Rank 311 Deepak Ramachandra Shet
Rank 455 Ravinandan B M

January 2023
MTWTFSS
 1
2345678
9101112131415
16171819202122
23242526272829
3031 
« Dec    

Browse by Category

  • Agriculture
  • Disaster Management
  • Economy
  • Environment
  • Ethics
  • Foreign Affairs
  • Geography
  • Governance
  • History
  • Law & Policy
  • Opinion
  • People in News
  • Places in News
  • Science & Tech
  • Security
  • Society
  • Sports
  • Uncategorized

Browse by Tags

AIR All India Radio BBC Business Line Business Standard dow Down to Earth DownToEarth DTE Economic Times ET FAO Financial Express GS-1 GS-2 GS-3 GS-4 Hindustan Times IE India & the world Indian express Indiatoday India today Kurukshetra Livelihoods portal LiveMint Mains News News Paper Newspaper PIB Prelims PRS India RSTV Science Reporter Survey The Hindu The India Express The Indian Express The Print the wire Times of India TOI TOPPERS Yojana
JournalsOfIndia

Our vision is to orient the readers to grasp the facts objectively and analyse critically. In the rush of reaching first to the readers, the websites miss the balanced opinion, which is the need of the hour. We aim to reach the readers with more crispness, preciseness and relevance. We bring the articles in UPSC way for the civil services aspirants and the Wisest Way for general readers.

Categories

  • Agriculture
  • Disaster Management
  • Economy
  • Environment
  • Ethics
  • Foreign Affairs
  • Geography
  • Governance
  • History
  • Law & Policy
  • Opinion
  • People in News
  • Places in News
  • Science & Tech
  • Security
  • Society
  • Sports
  • Uncategorized

Browse by Tag

AIR All India Radio BBC Business Line Business Standard dow Down to Earth DownToEarth DTE Economic Times ET FAO Financial Express GS-1 GS-2 GS-3 GS-4 Hindustan Times IE India & the world Indian express Indiatoday India today Kurukshetra Livelihoods portal LiveMint Mains News News Paper Newspaper PIB Prelims PRS India RSTV Science Reporter Survey The Hindu The India Express The Indian Express The Print the wire Times of India TOI TOPPERS Yojana

Newsletter

The most important UPSC news and events of the day.

Get Journals daily newsletter on your inbox.

© 2020 JournalsOfIndia - A free initiative by Manifest Team.

  • Login
  • Sign Up
  • Home
  • SNIPPETS
  • ARTICLES
  • BROWSE
  • DOWNLOADS
No Result
View All Result

© 2020 JournalsOfIndia - A free initiative by Manifest Team.

Welcome Back!

Login to your account below

Forgotten Password? Sign Up

Create New Account!

Fill the forms bellow to register

All fields are required. Log In

Retrieve your password

Please enter your username or email address to reset your password.

Log In