Zero Coupon Bonds

US T STRIPS Treasury STRIPS are 0 coupon long term Government securities. Their maturities are normally over 10 years out to 30 years. They are backed by the US Government, thus they carry no credit risk. T STRIPS do not pay interest, since they are 0 coupon bonds. They are created from called back treasury notes and bonds by the US Government. The yield is calculated based on the price paid and par value at redemption. During times of lower short term interest rates, Strips are more popular. When yield levels are low - especially short term bank rates, reinvesting bond proceeds is not attractive. T Strips do not have reinvestment risk, because they are zero coupon securities. Reinvestment risk is when you are forced to reinvest proceeds or interest from one security. During times of low interest yields, having 0 coupon investments works to an investor's benefit - in theory. Zero Coupon Bonds Bonds that are bought at a deep discount and pay no rate of interest are known as zero coupon bonds. These securities will mature at a larger face value than the price it was bought at. These investments offer growth within a bond, but they do not offer any current income. These can be found in funds and annuities, since many of those assets are long term. Taxation Tax is normally paid each year on the earned interest from zero coupon bonds. This is also known as phantom income, so there is no taxation advantage to them unless they are bought into an IRA or other tax deferred account. Investment Risks Fiixed income investments and bonds that do not have a coupons or nominal yields have little or no reinvestment risk. The term reinvestment risk refers to an investor having to deposit or invest their interest payments received from other securities. When interest rates are low, this risk can be amplified. However with 0 coupon bonds - that issue is minimized by the fact that no payments are received until maturity. Since Zeros are usually longer term - this risk is even less realized. Treasury STRIPS are also Zero coupons. T Strips are Government guaranteed bonds that have no interest paid until the end. Also municipalities and corporations offer them. For more information, please email me at etedmond@sellandbuywithedmond.com.