Power Finance Corporation (PFC) has withdrawn its zero-coupon bond issuance for the second time in weeks due to weak investor demand, driven by high yield expectations and an oversupply of bonds. The planned ₹2,000 crore issue, with a ₹500 crore base and ₹1,500 crore greenshoe option, received bids between 6.20% and 7.02%.
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The state-owned Power Finance Corporation (PFC) has withdrawn its plan to raise funds through a zero-coupon bond issue.
Zero-coupon bonds are debt instruments, unlike conventional bonds, it do not pay regular interest (or "coupon") to the investor.
They are issued at a discount to their face value and are redeemed at the full face value upon maturity.
The investor's return is the difference between the discounted purchase price and the face value received at maturity.
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Example: An investor buys a zero-coupon bond with a face value of ₹10,000 for a discounted price of ₹6,000. On the maturity date, the investor receives the full ₹10,000, earning ₹4,000 as profit. |
No Regular Payouts => The primary benefit is the absence of periodic interest payments, which helps in managing cash flow during the life of the bond.
Locked-in Funding Cost => The cost of borrowing is fixed at the time of issuance.
Interest Rate Risk => These bonds are highly sensitive to changes in prevailing interest rates. If rates rise, the market value of the bond falls, and selling it before maturity could result in a loss.
Phantom Income Tax => Even though no cash is received until maturity, investors may have to pay tax annually on the "imputed" or accrued interest.
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Bond Yield: The total return an investor earns from a bond. It has an inverse relationship with the bond's price—when bond prices go down, their yields go up, and vice-versa. |
PFC intended to raise up to ₹2,000 crore but received bids where investors demanded yields ranging from 6.20% to 7.02%. This was higher than what PFC was willing to offer, leading to the withdrawal of the issue.
When investors anticipate that future interest rates in the economy will rise, they demand a higher yield on new long-term bonds, to ensure their investment remains competitive compared to newer, higher-interest bonds that may become available later.
Investors had previously incurred losses on a similar zero-coupon bond issued by REC (Rural Electrification Corporation), another state-owned entity. This has made the market more cautious and risk-averse.
It is a Maharatna Central Public Sector Enterprise (CPSE) under the administrative control of the Ministry of Power.
It is the financial backbone of the power sector. It plays a significant role in providing funding for all segments of the power industry, including generation, transmission, and distribution.
The government has designated PFC as a nodal agency for implementing key power sector schemes, such as the Revamped Distribution Sector Scheme (RDSS) and financing Ultra Mega Power Projects (UMPPs).
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PRACTICE QUESTION Q. Characteristics and Investor Return Consider the following statements regarding zero-coupon bonds: 1. Zero-coupon bonds are issued at a deep discount and repay their par value at maturity. 2. An investor's return on a zero-coupon bond is solely the result of semiannual coupon payments throughout the bond's life. 3. The term "accrual bond" is another name for a zero-coupon bond. 4. Zero-coupon bonds provide profit at maturity when redeemed for their full face value, as they do not pay interest. Which of the statements given above are correct? A) 1, 2 and 3 only B) 1, 3 and 4 only C) 2, 3 and 4 only D) All of the above Answer: B Explanation: Statement 1 is correct: Zero-coupon bonds are a type of debt security that is purchased at a price lower than its face value. The investor's return is the difference between the discounted purchase price and the full face value (par value) received when the bond matures. Statement 2 is incorrect: A defining characteristic of zero-coupon bonds is that they do not make periodic interest or coupon payments. The entire return is realized at maturity. Statement 3 is correct: Zero-coupon bonds are also referred to as accrual bonds or discount bonds. Statement 4 is correct: The profit for the investor is generated from the difference between the discounted price paid for the bond and the higher face value received when the bond matures. This is because no interest payments are made during the life of the bond. |
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