The AI (ChatGPT) Bond Investing Handbook: Zero Coupon Bonds

Here is the response from ChatGPT for the prompt zero coupon bonds entered on February 16, 2023.

A zero coupon bond is a type of bond that does not pay any periodic interest payments (or coupon payments) to the investor. Instead, the bond is issued at a discount to its face value, and the investor receives the face value of the bond when it matures. The difference between the face value and the purchase price represents the investor's return on the investment.

For example, let's say a company issues a zero coupon bond with a face value of $1,000 and a maturity of 10 years. The bond is issued at a discount, say $600, which means the investor pays $600 to purchase the bond. After 10 years, the bond matures, and the investor receives the full face value of $1,000. In this case, the investor's return on the investment is $400, which is the difference between the face value and the purchase price.

One advantage of zero coupon bonds is that they offer a way to lock in a fixed rate of return over a specific period of time, without having to worry about reinvesting interest payments. Zero coupon bonds can also be used as a tool for long-term financial planning, such as funding a child's education or a retirement savings plan.

However, one disadvantage of zero coupon bonds is that they do not provide any income until they mature, so investors may have to wait a long time before seeing a return on their investment. Additionally, the interest income from zero coupon bonds is subject to taxation, even though the investor does not receive any cash payments during the life of the bond.

Who Issues Zero Coupon Bonds?

is the response from ChatGPT for the prompt who issues zero coupon bonds entered on February 16, 2023.

Zero coupon bonds can be issued by a variety of entities, including corporations, municipalities, and governments. In fact, some governments issue zero coupon bonds as a way to finance their debt obligations.

In the United States, for example, the U.S. Treasury issues zero coupon bonds as part of its regular auction process. These bonds are known as "strips" because they are created by separating the interest payments from the principal of a regular Treasury bond. The strips are then sold as separate securities, with the principal and interest components trading separately.

Corporations may also issue zero coupon bonds as a way to finance their operations, fund capital projects, or restructure their debt. Municipalities, such as cities and states, may also issue zero coupon bonds as a way to finance infrastructure projects, such as building schools, roads, or bridges.

Investment banks and brokerages may also issue and sell zero coupon bonds to investors as part of their underwriting business. These bonds are typically issued in large denominations and are often sold to institutional investors or high net worth individuals.

Overall, zero coupon bonds can be issued by any entity that needs to raise capital and is willing to forego periodic interest payments in exchange for a lump sum payment at maturity.

Not All Bonds Are the Same Treasury STRIPS

Zero Coupon Bond Value Calculator (from buyupside.com)