Since the issuer of zero (or low) coupon bonds can annually deduct the current year's interest accrual without having to actually pay the interest until the bond matures (or is called), its cash flow each year is increased by the amount of the tax shield provided by the interest deduction.

Question

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Zero coupon bonds do not pay interest regularly but accrue interest until maturity or call. The issuer can deduct the annual interest accrual for tax purposes, which reduces their tax liability and increases their cash flow. This is known as the tax shield provided by the interest deduction.

Since the Issuer of Zero (Or Low) Coupon Bonds Can