Zero Coupon Bonds

You might think that zero coupon bonds are the real nothings of the investment world. They pay you no interest now nor will they do so for years to come. Worse, you are liable for income taxes on the interest you have not even received. What kind of an odd investment is this and who would want to buy it? Well, you might.

Zeros are not without their attractions. With a zero coupon bond, you can invest as little as $50 and be assured that it will grow to a specific sum when the bond comes due. The term generally ranges from six months to 30 years. These securities sell at really deep discounts. Example: for only $640 you could buy a corporate zero coupon bond in mid 1989 that would pay you $1,000 in 1994; for $245 you could get one that would pay you $1,000 in the year 2003.

When the bonds mature, you collect all the accrued interest. If you own a zero coupon, you are not confronted every six months or so with the problem of reinvesting the interest income to maintain the high yield. So you make as few investment decisions as possible.

And you can escape the necessity to pay taxes on the phantom interest year by year. just buy zero coupon corporate bonds for your Individual Retirement Account or your Keogh plan or some other tax sheltered account. Or invest in tax free municipal zero coupon bonds or super safe U.S. Treasury zeros.

Watch out for brokers' hidden markups. They can cause the prices and yields of zeros to vary. Many brokers don't disclose the commissions you pay. Take, for example, a $1,000 zero coupon bond maturing in the year 2009. One regional broker, A. G. Edwards & Sons, in St. Louis, quoted the bond in mid 1989 to sell for $170. But another broker, Butcher & Singer, in Philadelphia, would have charged $157.50. In the former case, you would collect a yield of 9. 1 %. In the latter, you would collect 9.4%. So, shop around among brokers to make sure of getting your very best deal.