Financial Instruments

Zero Coupon Bonds ESOPs

Prepared by -: Gauri Chopra

ZERO COUPON BONDS

Zero coupon bonds were first introduced in 1960s, but they did not become popular until the 1980s A zero-coupon bond (also called a deep discount bond) is a bond bought at a price lower than its face value, with the face value repaid at the time of maturity. CHARACTERISTICS -: 1. 2. 3. 4. 5. Issued at deep discount and redeemed at full face value. Some issuers may call zeros before maturity. You must pay tax on interest annually even though you dont receive it until maturity. Zero coupon bonds are more volatile than regular bonds Some of the coupons can be redeemed before the maturity.

ADVANTAGES Hold till maturity No regular interest payments DISADVANTAGES They are taxed just like regular bonds even though they do not pay interest until maturity. They pay no coupon interest to cushion the blow of any change in interest rates . EXAMPLE -: In India, the most popular Zero Coupon bond is NSC. State Run Power financier Rural Electrification Corporation issued 10 year deep discount bond with the Face Value will be 3,000 4,000 crores while the redemption value will be about 7,500 crores.

ESOPs
Louis Orth Kelso created the ESOP in 1956. An employee stock option is a call option on the common stock of a company, issued as a form of non-cash compensation. companies stock price --------------------- financial benefit to the increase employees Characteristics 1. Granted to specified no. of employees 2. It carry's' a right not the obligation 3. Amount of shares is certain at a predetermined rate and at a certain time. 4. Non- transferable 5. The exercise price is non-standardized

1. 2. 3. 4.

Advantages Employee Loyalty Employees are likely to become more cost- and profit-conscious. Additional money will be raised for the company as employees buy the shares. Takeover Protection Disadvantages A decline in the value of the options due to daily market fluctuations may lower the employees' motivation. The decision of who will be compensated may cause problems with noncompensated employees. In case of unstable cos, if large no. of employees try to exercise the option in the market then there is the chance of collapse in the whole equity structure of a company.

1. 2. 3.

EXAMPLE Infosys has 50,000 crores ESOPs till now.