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Zero-Coupon Bonds
Zero-coupon bonds (“zero”) represent a type of bond that does not pay interest during the life of the bond. Instead, investors buy these bonds at a steep discount from the “face value” (the amount a bond will be worth when it matures). When the bond matures, the investors will receive single payments equal to their initial investments plus the accrued interest.
Available in the secondary market and issued by the U.S. Treasury, corporations, and state and local government entities, zeros typically have long maturity dates, such as 10, 15, or more years. The initial price of a zero depends on the number of years to maturity, current interest rates, and the risk involved. For example, a zero-coupon bond with a face value of $5,000, a maturity date of 20 years, and a 5% interest rate might cost only a few hundred dollars. When the bond matures, the bondholder receives the face value of the bond ($5,000 in this case).
The value of zero-coupon bonds is subject to market fluctuations. Because these bonds do not pay interest until maturity, their prices tend to be more volatile than those for bonds that make regular interest payments. Interest income is subject to ordinary income tax each year, even though the investor does not receive any interest until the bonds mature.
The principal value of bonds will fluctuate with changes in market conditions. If redeemed prior to maturity, a bond may be worth more or less than its original cost.
The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. This material was written and prepared by Emerald.
© 2010 Emerald |
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All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy.
Securities licensed associates of Melton Financial Group Wealth Advisory, are Registered Representatives & Investment Adviser Representatives offering securities and investment advisory services through NATIONAL PLANNING CORP. (NPC), NPC of America in FL & NY, Member FINRA/SIPC, and a Registered Investment Adviser. Registered Representatives of NPC may transact securities business in a particular state only if first registered, excluded or exempted from Broker-Dealer, agent or Investment Adviser Representative requirements. In addition, follow-up conversations or meetings with individuals in a particular state that involve either the effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made absent compliance with state Broker-Dealer, agent or Investment Adviser Representative registration requirements, or an applicable exemption or exclusion. Melton Financial Group Wealth Advisory and NPC are separate and unrelated companies.
Thomas J. Melton,
Registered Principal
Dianne Melton,
Registered Representative