Zero coupon bonds are bonds that do not pay interest during the life of the bonds and are backed by the full faith and credit of the United States government. Investors buy zero coupon bonds at a deep discount from their face value, which is the amount a bond will be worth when it “matures” or comes due. When a zero coupon bond matures, the investor will receive one lump sum equal to the initial investment plus interest that has accrued.
Zero coupon bonds provide investors, who don’t need current income the opportunity to let their money grow, backed by the full faith of the United States Government, until a specific future date.
Who Should Invest In Zero Coupon Bonds?
Zero coupon bonds can be used by investors who seek to accumulate a specific amount of money by a certain future date.
Features of Zero Coupon Bonds
- Credit Safety – Zero coupon treasury bonds are backed by the government who guarantees payment of face amount of the bond at maturity.
- Tax Advantage – Zero coupon treasury bonds are state and local tax-free.
- Minor Initial Cash Investment Required – A relatively small investment today could grow to a large investment over time.
- Liquidity & Marketability – Investors can usually sell their zero coupon bonds on any business day at the current market value.
- Market Value Fluctuations – The price of zero coupon treasury bonds fluctuates with changes in interest rates.
- “Phantom” Income – Investors will be required to pay federal income tax on the accredited value each year, even though they have not received any amount of that income if zero coupon bonds are not held in a tax-advantaged account.
Our dedicated bond specialists are ready to discuss how Zero Coupon Bonds can play a strategic roll in your investment portfolio. Contact us today.
All investments involve risk, including loss of principal. Past performance does not guarantee future returns.