Answer to Question #182475 in Management for Okyere

Question

On 29th March, it was reported that Ghana had issued a zero coupon bond with a face value worth $525 million.

Discuss the practical mechanisms of a zero coupon bond. How will this benefit Ghana?

Answer 1

Zero-coupon bonds are bonds issued without interest, hence trades at a discount till maturity. Thus, unlike other traditional coupon-bearing bonds, Ghana will not pay any interest on the four-year zero-coupon bond. The only debt obligation that the government of Ghana would have to honour will be the face value of $525 million on maturity.

Ghana's existing domestic bonds attract an average interest rate of about 20%. This percentage can be used to retire existing domestic bonds therefore saving Ghana GHc480 million Cedis in interest a year.