I have a conceptual question regarding zero-coupon bonds. The issuer sells the bond at a deep discount to the face value. The discount becomes the capital gains (profit) for the bond holder. What is in it for the bond issuer? Why would the the issuer take in a loss by selling a bond at a discount?
Rationale for issuing zero coupon bonds
- Thread starter KBhat2826
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Sixcarbs
Active Member
They are borrowing money, on terms that fit their projected cash flows.
That's why we try and evaluate all bonds with the same types of yields to see how they actually compare in value.
Even if a Zero pays a slightly higher yield than a coupon bond, it may just be a better fit for the issuer's business.
That's why we try and evaluate all bonds with the same types of yields to see how they actually compare in value.
Even if a Zero pays a slightly higher yield than a coupon bond, it may just be a better fit for the issuer's business.
Sixcarbs
Active Member
The issuer of a zero coupon bond does not have to pay coupons. They just need to return the face value of the bond when it matures.
Example of a company that might choose to issue a Zero is an apartment building developer. They need money today to buy the land and build the building, but they will not have any revenue until the building is completed in 3 years and when they sell units to the public.
Okay this makes sense. What about stripping?
Why would you
1. Go through the hassle of stripping?
2. And give a discount on p strip while the issuer could just get the full value of financing (say $1000) without stripping?
Because the obligation of full contractual coupon payment still exists. Currently it seems like a disadvantage to the issuer
Sixcarbs
Active Member
The stripping is usually done by bankers looking who have markets for the different components (and they make double the fees by servicing two different customers.)
Again it's not that they are giving a discount. You must compare yields, and maybe their business model does not have the cash flow to support regular coupon payments right now.
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