Zero coupon bonds return
Show 5 More. Our in-depth tools give millions of people across the globe highly detailed and thoroughly explained answers to their most important financial questions. Each month, more than 1 million visitors in countries across the globe turn to InvestingAnswers. Financial Dictionary Calculators Articles. Zero-Coupon Bond. What it is:.
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What is a Small-Cap Stock? Profiting from Options. The Advantage of Tax-Advantaged Funds.
- How Do I Calculate Yield To Maturity Of A Zero Coupon Bond??
- Learn more about these unusual investments..
- How to Calculate Yield to Maturity of a Zero-Coupon Bond;
Value Traps vs. Bargains -- How to Spot the Difference. The ABC's of Stocks. A Primer on Inflation-Linked Bonds. Financial Dictionary. InvestingAnswers, Inc. All Rights Reserved. Short-term zero coupon bonds usually mature within a year and are called bills. That makes them ideal for retirement savings and financing college educations.
How Do I Calculate Yield To Maturity Of A Zero Coupon Bond?
Zero-coupon CDs are also useful to give children or grandchildren a stake for business or starting a family. Investors who need to generate a steady income find little use for zero coupon CDs because they not only won't receive interest payments for up to two decades but also will have to pay taxes on accrued interest that they don't receive until the CD matures. One of the big advantages of zero coupon CDs is that they generally carry higher interest rates than other bonds. That's ideal for the small investor saving for a predefined financial goal.
Zero-coupon CDs also are ideal for investing with specific goals in mind such as paying for college educations or funding a comfortable retirement. You get the advantage of knowing exactly how much your investment will return.
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- The Zero Coupon Bond: Pricing and Charactertistics;
One of the biggest disadvantages of zero coupon bonds is that you have to pay taxes on "phantom" interest that accrues to your account even though you don't receive the actual interest until later. The bonds—with higher interest rates—are also subject to higher default rates. The principals keep the money and interest to use as they please, and many don't make arrangements to pay off the debts when due. The companies can also pay off their zero-coupon CDs with accrued interest early before the term is over, so the strategy isn't always foolproof. Bond investing can be attractive to many investors because bonds tend to generate more stable returns.
You receive regular interest payments, and bonds don't fluctuate as widely as stocks. Treasury bonds can provide liquidity and stability for nervous investors.
The Zero Coupon Bond: Pricing and Charactertistics
Bondholders get paid before stockholders if the investment defaults and is liquidated. Bonds have clear ratings that range from a AAA rating, the highest, to a C-rating, the lowest. Bond investing is ideal for investors who want to earn regular interest until their bond matures. It's perfect for retirement investing and earning regular income from a financial windfall or savings at a higher rate than banks offer.
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The cons of bond investing include earning a lower return on your investment when compared with investing in stocks and zero coupon CDs. Interest rates on long-term bonds can fluctuate dramatically if interest rates rise and fall. Returns are fixed, and you might have to forego higher earnings in a strong financial market. Bonds usually require investing a larger amount of money than other investments. Bonds are generally less liquid than other investments—especially high-interest bonds issued by smaller companies—which are often called junk bonds.
Investing in bonds allows you to choose from corporate and municipal bonds. The former may be more volatile but earn higher returns. Municipal bonds are more stable and less likely to fluctuate wildly. Municipal and U.
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- Key Differences Between Zero Coupon CD and Bonds!
Treasury bonds often have built-in tax advantages.