Explain the rationale for why anyone would choose to buy a zero coupon

Explain the rationale for why anyone would choose to buy a zero coupon bond that pays no interest prior to maturity and pays only the face value of the bond at maturity.

What will be an ideal response?

ANSWER

Zero coupon bonds pay only the face value at maturity and nothing else. Thus these bonds may be attractive to investors that have specific maturity needs such as saving for a young child’s eventual college tuition. Zero coupon bonds also eliminate the concern of reinvestment rate risk, or what to do the intermediate cash flows that occur prior to maturity with more conventional coupon bonds. Finally, zero coupon bonds sell at a deep discount from face value.