Bond stripping is the practice of buying an issue of treasury securities and then selling a collection of zero-coupon bonds such that the payments received from the treasuries exactly cover the payments promised to the buyers of the zeros.

a) Investment bankers strip bonds because they are able to sell the individual pieces for more than the cost of the underlying treasury securities. Why might certain investors (for example, a pension fund) be willing to pay more for pure discount bonds than for coupon bonds of a similar maturity? Remember, a pension fund pays no taxes on either sort of bond.

b) Suppose everyone in the world suddenly becomes risk neutral. What effect, if any, would this have on an investment bank's ability to make money from bond stripping?

Answer rating: 100% (QA)

a Certain investors such as pension funds may be willing to pay more for pure discount bonds zerocoupon bonds than for coupon bonds of a similar matur... View the full answer