Why will someone prefer to buy a zero coupon bond rather than a >0% coupon bond?
To make a zero coupon bond pay, it is sold at a discount to face value. For instance, if the bond is worth $1,000 at maturity, it might be sold at $970. Then the buyer gets a gain of $30 (a little over 3% on $970) when the bond matures.
Treasury bills are sold as zero coupon "bonds." One advantage is that if you buy, say, a six month bill in November 2011, you don't get a gain on it until May, 2012, and don't have to pay tax on it until 2013.
Long term bonds can be made into zero coupon bonds by "stripping" the coupons. They are then re-sold at the appropriate discount. The advantage is that your interest rate is determined by the discount. You don't have to worry about reinvesting the interest (coupons) at a different, and possibly lower rate.
It's the early 80's. Long term rates are at 14% or greater. When you spend $1000 to get $140 per year you may be happy, but you also have an issue of reinvesting that coupon payment. By spending the same $1000 for a zero coupon bond, you'll buy nearly $51,000 face value for the final payment 30 years hence. This is an example of how crazy compound interest is over this time span, and high rate.
I buy tax free bonds and I buy mostly zero coupon bonds. When I buy a bond, I normally want the following:
1) The interest is tax free.
2) A good bond rating.
3) Long term so I can get a good interest rate.
Given all these requirements, the only bonds that seem to be available to me are zero coupon bonds.