Context

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

About

• A zero coupon bond is a type of fixed income security that does not pay any interest to the bondholder. It is also known as a discount bond.

They are long term debt instruments. 

• These bonds come with 10-15 years maturity. At the time of maturity, the investor is paid the face value or par value.
• These bonds are issued at a discount to the face value. In other words, it trades at a deep discount.
• The return an investor earns is the principal amount plus interest amount. The interest gets compounded semi-annually.

Who can invest?

• These recapitalisation bonds are special types of bonds issued by the Central government specifically to a particular institution.
• Only those banks, whosoever is specified, can invest in them, nobody else. It is not tradable, it is not transferable.

Advantages of investing

• Significant returns on maturity
• Fixed interest
• Long investment horizon

Limitations of investing

• No regular income
• Interest rate risk
• Illiquidity in the secondary market
• Duration risk