zero coupon bonds

Discussion in 'Economics' started by BA_Trader, Jan 5, 2005.

  1. Why the hell would anyone want these things?

    Do people really have to go to these lengths to prevent
    themselves from blowing junior's college money?

  2. scrorge


    They move big when interest rates change.
  3. H2O



    Interest is taxable, zero coupon bonds don't pay interest, they advance(decline) in price.
  4. WHile I see how you arrive at your numbers (25/1000---280...)I believe your conclusion is off. First, if you read over to the YTM (yield-to-maturity), which seems more on target. Second IF it were 10% then this would not be an infrequent discussion. Everyone and their mother would be raving about and investing in them, not to mention numerous arbitrage between zero's and the straight bonds, and against corporates...

    Think about it: 10% return on a (essentially risk-free) government bond in the current rate environment?

  5. You better keep trading Nasdaq stocks and forget about bonds if you're convinced of what you just wrote !

    Even yahoo has computed the YTM for you : 5.05%
  6. according to the SEC this isn't true --

    "In addition, although zero coupon bonds do not pay any interest until they mature, investors may still have to pay federal, state, and local income tax on the imputed or "phantom" interest that accrues each year."

    -- and this is the main reason I can't see the value in these things
    beyond keeping hands out of the cookie jar.
  7. The primary benefit of zero coupon bonds is that there is no reinvestment of coupon risk. For longer term interest-bearing bonds held to maturity, the biggest hidden risk is reinvestment of your coupon flow. The yield to maturity calculation is actually an estimate, with the key assumption that all coupons earned during the life of the bond will be reinvested at the same yield. This almost never happens. If rates go up, you get to reinvest at higher rates, but meanwhile, the value of your bond has fallen, and vice-versa. For pension funds and life insurance companies that need to pinpoint assets to target dates to offset liabilities, and/or cannot tolerate reinvestment risk, zeros are perfect. For individuals, they make more sense in an IRA for reasons stated before. They can be great trading vehicles too, but you'd better understand the dynamics of how they are priced vs. the yield curve, or you can get burned.
  8. is accurate.

    H2O - please don't give tax advice without thoroughly checking it.
  9. H2O


    I'm no US citizen....

    Where I live (Europe), this is how the situation used to be : interest is taxed, but capital gains are not.

    At the moment a new system is in place,
    We only pay 1.2% taxes (regardless of the return we make) on our accounts. (Of course this is different if you're a trader (tax status) In that case you will pay income taxes on your gains)

    Hope this helps
    #10     Jan 6, 2005