Zero Coupon Bonds Essay -- essays research papers

Zero verifier bonds, more(prenominal) than comm whole known as strips or zeros, ar fixed income securities that conflicting other bonds, concede no interest until due date. This means that instead of give semi-annual interest like other bonds, the interest is compounded throughout the flavour of the bond and is paid in full upon maturity. Zero coupon bonds ar ideal long-term investments for people who have a specific situation, which calls for a specific amount of money to be acquired at a rising date, mainly ten to twenty historic period in the future. These bonds offer a great variety of benefits that be attractive to investors who are looking for more of a long-term investment. They also pose a few drawbacks, notwithstanding are outweighed by their advantages which make them a sound investment. Zero coupon municipal bonds combine the benefits of the zero coupon instrument with those of tax-exempt municipal securities and offer the following advantages Low Minimum I nvestmentThe first topic that comes to mind when investing in zero coupon bonds is its low sign investment. Zeros are sold at a deep discount congress to other bonds and therefore can be purchased with a low minimal investment. Investors purchase zeros for much less than their grimace value, which is typically in increments of $5000, however, zero-coupon bonds with face values of $1000 are also sold. The greater the number of years a zero-coupon bond has until maturity, the less an investor has to pay for it. The reason of such a low initial investment is another benefit of zeros, compounded interest. The slight initial dollar outlay makes zeros attractive investments for m both investors. It allows investors to put excursus a modest amount of money today and know but how much they will receive at a specific future date. Tax AdvantagesAnother benefit of zero-coupon bonds is its possible tax advantages. Interest on municipal zero-coupon bonds is exempt from federal income tax es and, in many cases, large-minded from verbalize and local taxes. Because municipal zeros offer the benefit of compound interest free from federal taxes, they provide returns that are often much higher on a net basis than comparable taxable securities. Zeros purchased prior to April 1993 and held to maturity are not subject to seat of government gains tax unless they are purchased at a price lower than the compound accreted value (CAV). The sale or excha... ...e volatility of the bond. Zeros are extremely volatile investments. This means that if the interest count changes, it can swing the price of the bond in either direction. However, this is only a problem if the bond is sold sooner maturity. If the bond is held to the advance date, the investor will receive the full face value. If the bond is sold before it matures, there could be a possibility that the investor could lose money. Another get to that zeros offer is its possible tax charges. Although zeros dont include any coupon payments because they pay no annual interest, the investor is still obligated to pay income tax on the interest he would of earned for the year withal though he didnt receive it. Of course there are ways around this if you invest in tax-exempt municipals where there are no charges. One more drawback of zeros is that they can be callable. This means that the issuer has the recompense to repurchase the bond back from the investor at any time before maturity. If the issuer repays the bond at a certain percentage rate, it can potentially lose money for the investor. You would also have to pay a capital gains tax if the IRS thinks you made more than you should.