What is Zero Coupon Rate Bonds: What is benefit to Government: Possible MCQ

Zero Coupon Bond

At present many Analysts are suggesting an issue of Zero Coupon Bonds to fund stimulus package.

These Bonds are issued at Discount and Redeemed at Face Value on Maturity.

No Interest Payment during Tenure of Bond.

Interest Cost is indirectly Built in the Discount given at the time of issue of Bond.

  1. For Instance Rs.100 Bond for 5 Years will be issued at Rs. 62 (to give effective interest at the rate of 10% p.a.) and will be redeemed at Rs.100 after 5 Years. Therefore, discount of Rs.38 is towards interest cost only.

Benefit to Government in Issuing Zero Coupon Bonds

Benefit to Government in issuing Zero Coupon Bonds is that there is no cash outflow of interest cost during tenure of Bonds. (For instance, there is no interest payment for Five Years in above example).

Indirectly interest cost is payable at the time of maturity of Bond i.e. at the end of Five Years. So Government can issue Zero Coupon Bonds for Long Time like 30 Years to save itself from Cash Outflow on account of interest payment and help it in managing its finances in tough times.

Possible MCQ Statements

  1. There is No Interest Cost in Zero Coupon Bonds: False

  2. There is No Interest Payment During Tenure of Zero Coupon Bonds: True

  3. During Tenure of Zero Coupon Bonds, Fiscal Deficit is Reduced as there is no interest Payment: True

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