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Who Should Buy Zero Coupon Bonds?

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Zero Coupon Bonds Available at Deep Discounts

Zero Coupon Bonds

Zero coupon bonds have a number of unique properties that make these types of bonds an effective tool for investors who are looking to meet certain financial objectives.  Nonetheless, it is important to note that zeroes are not the bond to go for if you are looking for a bond that does not bring any tax liability with it!

Just like any type of bond, the zero coupon bond is very useful for those who wish to target a future financial goal, such as saving for retirement or paying for a kid to go to college.  However, many of the similarities end there.  While you will get a great discount off the face value of zeroes, you will not get any interest income from the bond while you own it.  Many investors like that idea, since they do not have to come up with the full face value of the bond when it is purchased. Some bonds sell for seventy percent to eighty percent of their face value when buying a bond that you will hold for twenty-years or more.

Who Should Buy Zero Coupon Bonds

This lower cash out lay upfront is essentially a tradeoff, since owning this bond will subject you to the same tax that you would pay on regular bonds.  Issuers of zero coupons will send out a statement each year that details the amount of interest that the bond earned that year.  This interest is referred to as phantom interest, since you can see it there but you cannot touch it.   The tax debacle can sometimes be solved by buying municipal zeroes, since there is no federal tax assessed on this type of bond, and depending on where it is issued, it may be free from state tax, too.  Investors should bear in mind that although they will be taxed each year on these bonds, the tax would be paid up when the bond reaches maturity.  The bottom line when it comes to who should buy zero coupon bonds is simple: these bonds are a perfect choice for investors who are not bothered by the tax consequences of such a bond, and who are looking for an investment vehicle that provides a solid foundation that they can depend on for future needs.

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