Final answer:
Merrill Lynch can create a number of zero-coupon bonds equal to the number of semi-annual coupon payments of the stripped Treasury bond, which in this case is 40. Bonds are debt securities and their value fluctuates with changes in interest rates.
Step-by-step explanation:
When Merrill Lynch decides to strip a Treasury bond into zeros, with a maturity of 20 years, a coupon rate of 10%, and semi-annual coupon payments, they can create a specific number of zero-coupon bonds. The number of zero-coupon bonds that can be created is equal to the number of individual coupon payments made over the life of the bond. For a bond with a 20-year maturity and semi-annual coupons, there will be 40 coupon payments (2 payments per year for 20 years), meaning 40 different zero-coupon bonds could potentially be created from the original Treasury bond.
Bonds are debt securities through which the issuer owes holders a debt and is usually obligated to pay interest (coupon) and repay the debt on the maturity date. The value of bonds to investors is influenced by changing interest rates in the economy. If interest rates increase, existing bonds with lower rates become less attractive, often resulting in price reductions to entice investors.