Published: 4th Jan, 2021
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.
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.
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Coupon
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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.
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Price of Zero Coupon Bond calculated annually
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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
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