Are there any advantages to zero-coupon bonds from the issuers' perspective?

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The most obvious advantage for a corporate issuer of zero-coupon bonds is the high demand for this type of security. These bonds are priced much lower than current coupon securities with the same face value. Buyers can also avoid paying different forms of taxes on their income from these bonds. As a result, yields required for zero-coupon or mini coupon bonds are substantially lower than those for current coupon bonds. The difference is typically 50-100 basis points. This represents significant savings for corporate users. These bonds also have no impact on corporations' cash flow before they mature. However, at maturity, they require large amounts of capital expenditure. Also, the tax advantages of this form of issuance can result in borrowing costs approaching zero for firms.

Municipal issuers are also guaranteed a high demand for their zero-coupon bonds largely due to the tax-exempt status they enjoy. Indeed some zero-coupon bonds are exempt from both federal, state and local taxation. For the Federal government, the zero-coupon bonds it issues can also be sold at significantly lower rates with reduced annual cash flow requirements. With no risk of default, the government can freely float this type of security knowing that issuances will be completely subscribed. This type of bond can also have very long maturities, an advantage for both the Federal government and for buyers.

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