What are the benefits to the issuers of zero-coupon bonds?

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The zero-coupon designation means that a bond does not pay interest during its life. These bonds are offered at a deep discount off their face value. When the bond matures, the investor will receive the full face value. One benefit to the issuer is the long-term maturity date, such as ten or more years. Because such a term corresponds with a potential investor’s long-term goals, they are incentivized to purchase the bonds. This can benefit the issuer by encouraging a high volume of sales, which can generate substantial income. In addition to individual investors, secondary markets also trade in zero-coupon bonds, further increasing sales volume. The delay in payout until the distant maturity date is beneficial by decreasing the issuer’s short- and medium-term expenditures.

Tax advantages create additional benefits to issuers and buyers. While some bonds are issued by the US Treasury, corporations, states, and municipalities also issue bonds. Different benefits may accrue to these diverse issuers. Payment of the imputed future tax is often required as it accrues, so municipal issuers may benefit from the sale of tax-exempt bonds to residents of a given state; similar benefits are available to corporations with tax-exempt status. Investors are drawn to purchase these to avoid paying the imputed tax.

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