I have a conceptual question regarding zero-coupon bonds. Say a bond issuer has issued a bond for funding itself, this bond has been split by the issuer (for simplicity assuming issuer is the same as market maker).
The issuer sells the bond at a deep discount to the face value. This discount becomes the capital gains (profit) for the bond holder. The issuer has therefore two obligations:
- C-STRIPS in which the issuer is paying coupon payments
- P-STRIPS in which the issuer is paying the discount
Why would the the issuer undertake two obligations of coupon payments and discounted bond prices? If the bond was not stripped, the issuer would only have one obligation of coupon payments and would get the entire face value as a funding source. But by stripping the bond, the issuer has eroded its funding.
What is the rationale for the bond issuer to do so?