Zero Coupon Bonds - Why Are they so Special?

Created in 1982, zero coupon bonds intention was to offer a financial instrument to guarantee long-term investments in securities, backed up by big and stable organizations, like states or transnational companies.

TYPES OF ZERO COUPON BONDS

Also known as strip bonds, there are four types of them. The first one is known as zero coupon municipal bonds. Also known as government zero coupon bonds, they have the advantage of not being affected by federal taxes. And in some cases, they are not even affected by state or local taxes. As a consequence, the Return Over Investment (ROI) may be higher than other kind of zero coupon bonds. Another advantage is that they don't require a huge amount of capital. You only need a minimum of US$5000, an easily achievable figure in the USA. Additionally, it is rated as an A or even triple A investment, which has a high degree of liquidity. This is very practical if you need the money and wish to sell your securities. All of these reasons have created a market of US$124 billion for this type of bond.

Another kind is the zero coupon corporate bond. Although their ROI is higher than any other kind of bond, they are affected by federal taxes. But there are some other advantages. You may choose a wide portfolio of bond investments for you or your clients (many companies issue zero coupon bonds), they have a fair liquidity and are well ranked as instruments for investment.

The third type is known as zero coupon treasury bonds. This kind of bond is issued by the Treasury of the United States and is considered the safest type of bond since it is backed up by the United States government, a country that has existed for more than two hundred years.

Finally, the fourth type is called short term zero coupon bond. They reach their period of maturity in one year and are also known as bills. The US Treasury bill market is considered the most liquid debt market in the whole world.

But issuing zero coupon bonds ain't an easy task. Any organization, public or private, who wishes to follow this path, needs to comply with a series of requirements that guarantees the money of their investors. That's why there are entities that rate the risk of bonds. Remember that a higher risk means a higher ROI, but also the possibility to lose your money.

Continue to: Differences of Zero Coupon Bonds