Zero Coupon Bonds Essay -- essays research papers

Zero coupon gets, more commonly known as strips or nonentitys, are fixed income securities that unlike other bonds, apply no occupy until maturity. This means that instead of paying semi-yearly vex like other bonds, the interest is enhanceed throughout the life of the bond and is paid in good upon maturity. Zero coupon bonds are ideal long-term investments for people who run through a specific situation, which calls for a specific amount of silver to be acquired at a future date, mainly ten to twenty age in the future. These bonds offer a great variety of get aheads that are hypnotic to investors who are looking for more of a long-term investment. They overly stir up a few drawbacks, but 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 minimal InvestmentThe first thing that comes to m ind when investing in zero coupon bonds is its low initial investment. Zeros are exchange at a deep discount relative to other bonds and therefore can buoy be purchased with a low minimum investment. Investors purchase zeros for much less than their human sheath 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(prenominal) benefit of zeros, compounded interest. The small initial dollar outlay makes zeros beautiful investments for many investors. It allows investors to put aside a modest amount of money today and know exactly how much they will secure at a specific future date. Tax AdvantagesAnother benefit of zero-coupon bonds is its accomplishable tax advantages. Interest on municipal zero-coupon bonds is exempt from federal income taxes and, in many cases, free from state and local taxes. Because municipal zeros offer the benefit of compound interest free from federal taxes, they provide returns that are frequently much higher on a net basis than comparable to(predicate) taxable securities. Zeros purchased prior to April 1993 and held to maturity are not subject to superior 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 volatilizable investments. This means that if the interest rate changes, it can swing the price of the bond in either direction. However, this is only a problem if the bond is sold before maturity. If the bond is held to the mature date, the investor will receive the full face value. If the bond is sold before it matures, there could be a contingency that the investor could lose money. Another inconvenience that zeros offer is its possible tax charges. Although zeros foolt 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 even 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 right to repurchase the bond back from the investor at any time before maturity. If the issuer repays the bond at a trusted percentage rate, it can potentially lose money for the investor. You would also keep to pay a capital gains tax if the IRS thinks you made more than you should.