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A zero coupon bond or zero is a debt instrument that is a sold at deep discount from face value. These bonds do not pay periodic coupons and the value of bond increases as they approach maturity.

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Recent Debt Market InnovationsProf Mahesh KumarAmity Business Schoolprofmaheshkumar@rediffmail.comZero Coupon SecuritiesA zero coupon bond or zero is a debtinstrument that is a sold at deep discount fromface value.These bonds do not pay periodic coupons andthe value of bond increases as they approachmaturity.Zero Coupon Securities- HistoryThe first zero coupon products involving Treasury securitiesand having a maturity greater than one year wereintroduced in 1982 by Merrill Lynch and was known asTreasury Investment Growth Receipts or TIGRs bearingTreasury securities and removed the coupons- therebyseparating the coupons and the final redemption paymentinto separate cash flows. These individual cash flows eachcorresponding to different maturity were then used tocreate irrevocable trusts with a custodial bank. As a finalstep, the custodial bank issued shares in the trusts. Theseshares were TIGRs that Merrill Lynch then marketed to itsclients. Although TIGRs were not themselves issues of theTreasury, they were fully collaterized by Treasury obligationsand nearly equivalent to Treasuries in terms of default.Zero Coupon SecuritiesThe purchaser of zero coupon Treasuries who matchesthe bonds maturity and horizon is freed from interestrate risk, default risk and reinvestment risk.Zero coupon bonds are exposed to purchasing powerrisk- the risk that the terminal proceeds will have moreor less purchasing than e

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