Zero-coupon bond

Zero coupon bonds are bonds that do not pay interest during the life of the bonds. Instead, investors buy zero coupon bonds at a deep discount from their face value.


 * Zero-coupon bonds or “zeros” result from the separation of coupons from the body of a security.
 * Zeros sell at discounts from face value.
 * The difference between the purchase price of the zero and its face value when redeemed is the investor's return.
 * Zeros can be purchased from private brokers and dealers, but not from the Federal Reserve or any government agency.

Treasury STRIPS
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Zero-coupon Corporate Bonds
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Zero-coupon Municipal Bonds
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Tax Aspects
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Zero-coupon Bond Funds
American Century offers four Target dated zero-coupon bond funds, all set to mature and liquidate by a set maturity target date. Although it is convenient to purchase as a mutual fund, an investor should carefully compare the 0.57% expense ratio (which is paid every year) to the commission and bid/ask spread of purchasing a zero-coupon bond directly. In many cases (particularly long-dated bonds where you are planning to hold to maturity), purchasing the bond directly will likely cost less.


 * American Century Target 2010 (BTTNX), expense ratio (0.57%)
 * American Century Target 2015 (BTFTX), expense ratio (0.57%)
 * American Century Target 2020 (BTTTX), expense ratio (0.57%)
 * American Century Target 2025 (BTTRX), expense ratio (0.57%)

Vanguard offers an index fund, the Extended Duration Treasury Index Fund, based on the Barclays Capital U.S. Treasury STRIPS 20–30 Year Equal Par Bond Index. Unlike the American Century funds, this fund has no set maturity date, as the maturity is meant to remain at around 25 years. The fund is only available in institutional and ETF shares.

Links

 * Treasury Direct: STRIPS
 * Investing in Bonds: Zero-coupon Municipal Bonds

Papers

 * Minimizing funded ratio volatility with extended duration bonds