Zero-coupon bonds explained.
If you’re looking for a cheap type of bond to invest in, then you might want to take a look at zero-coupon bonds. These bonds are cheaper because of the way in which they’ve been stripped of their “coupon”. This is essentially the part of the bond that allows you to receive interest payments as the interest accumulates. If you buy a zero-coupon bond, then you will be getting the interest payment all in one lump sum after the bond matures.
One thing that you should keep in mind if you’re looking at purchasing a zero-coupon bond is that you’ll still need to pay the taxes on your interest as you go. This might not seem like a good idea at first, since you’ll be paying taxes on interest payments that you aren’t going to receive for a long period of time. However, due to the way in which zero coupon bonds are sold, you should end up making more money with one of these bonds than you would with an ordinary bond.
Another thing that you should keep in mind about zero-coupon bonds is that sometimes they can be called before maturity. If your bond is called before maturity, this means that you’ll be given the interest that you’d accumulated so far and will need to buy the bond again at a lower interest rate. Therefore, before you buy any bond (especially a zero-coupon bond) you should make sure that you know exactly what the requirements are before the bond can be called.
While zero-coupon bonds usually have higher yields at maturity, there is also a much higher chance that the bond could default. If that happens, then you will lose your investment. However, in most cases, it is unlikely for the bond to actually default. If you’re worried about this, then you should make sure that you check up on the company that you’re buying a bond from. It should not be too difficult to find out how stable the company is.
In the end, however, you will have to figure out whether or not the advantages of zero-coupon bonds are enough to warrant purchasing them. It is possible that the disadvantages are a high enough risk to make these bonds too risky.