Why Zero Coupon Bonds Are Different from other Bonds

The main difference is that zero coupon bonds don't pay interests over the life of the bond, but at the end. That means that at the end of the period, let's say, twenty years, the investor will receive the initial amount of money that he invested, the interests over his investment and any additional money consequence of inflation. The second principal difference is the period of maturity of the bond. While traditional bonds can last only for some months, a common period for a zero coupon bond is of thirty years.In the case of normal bonds, the investor receives semiannual payments (depending on the conditions of the bond) during the life of the bond. But, as in the case of a zero coupon bond, he will receive the original amount of money only at the end of the term.

WHAT IS THEIR PURPOSE?

The principal interested for this kind of financial instrument is a pension fund. Since they need to leverage their portfolio of high risk investments, they immediately look at the bond market as a counterweight for any misshapen. From all the reasons indicated above, a zero coupon bond is one of the most recurred security by these entities.

Another kind of sector interested in these instruments are insurance companies, who manage huge amounts of money and have to search for different kind of financial services in which to invest.

Families and individuals are also keen to invest in zero coupon bonds. They usually use it as part of their retirement plan or as a long term investment for their kid's education.

WHERE DO I GET THEM?

If you are interested in buying zero coupon bonds, you may start at a mutual fund. They should have a variety of zero coupon bonds that are available in the market. You can also go to a broker and ask for the zero coupon bonds that they can offer.

At either of these options you should receive advice on which type of zero coupon bond you should acquire. They have the experience and knowledge to understand their clients and offer them the one that best suits their needs.

From all of these options, it seems that zero coupon municipal bonds are the most adequate for the small investor since it only requires a reasonable amount of money and offers a good ROI. But take note about this, you only can buy it if you live within the zone where it was emitted. In the case of pension funds and other kind of financial entities, the other type of zero coupon bonds seem as a more adequate choice for their kind of business.