Context:
The National Bank for Agriculture and Rural Development (NABARD) has received central government approval to raise ₹19,500 crore (approximately $2.3 billion) through deep-discount zero-coupon bonds, the largest such approval among state-run entities this fiscal year. The bond issuance will remain open for subscription until March 31, 2027.
What Is a Zero-Coupon Bond?
A Zero-Coupon Bond (ZCB) is a type of debt security that does not pay periodic interest (coupons). Instead, it is sold at a deep discount and redeemed at full face value (par value) upon maturity. The investor’s return is the difference between the purchase price and maturity value.
Also known as: Accrual Bond
Key Features of Zero-Coupon Bonds:
- No periodic interest payments (coupons)
- Issued at a discount, repaid at full face value at maturity
- Return = Par Value – Purchase Price
- Subject to interest rate risk if sold before maturity
- Longer maturity = deeper discount = more price volatility
Who Issues ZCBs?
- Government entities
- Corporations
- Financial institutions (which may strip coupons and repackage bonds)
How Zero-Coupon Bonds Work:
- Investor buys a ZCB at a low price (e.g., ₹6,855)
- At maturity, the investor receives full face value (e.g., ₹20,000)
- The implied yield (e.g., 5.5%) is compounded semiannually
- No interim payments; interest is “imputed” or “phantom” interest
Strategic Implications for NABARD
- Supports long-tenure fundraising for rural credit and infrastructure projects.
- Deepens the long-term debt market with more structured offerings.
- Government backing may improve market confidence in upcoming tranches.
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