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zero coupon bonds
- Thread starter BA_Trader
- Start date
http://bonds.finance.yahoo.com/z1?b...0000&ytl=-1.000000&ytu=-1.000000&yu=-1.000000
Looking at the May 2030 zero coupon treasuries,they are currently priced at $282.50,in which you receive $1000 upon maturity.So for example with a $1,000,000 investment,you average out to $101,592 per year in interest over the 25 years,versus say $50,000 per year in interest on a 5% coupon bond.
Looking at the May 2030 zero coupon treasuries,they are currently priced at $282.50,in which you receive $1000 upon maturity.So for example with a $1,000,000 investment,you average out to $101,592 per year in interest over the 25 years,versus say $50,000 per year in interest on a 5% coupon bond.
WHile I see how you arrive at your numbers (25/1000---280...)I believe your conclusion is off. First, if you read over to the YTM (yield-to-maturity), which seems more on target. Second IF it were 10% then this would not be an infrequent discussion. Everyone and their mother would be raving about and investing in them, not to mention numerous arbitrage between zero's and the straight bonds, and against corporates...
Think about it: 10% return on a (essentially risk-free) government bond in the current rate environment?
Think about it: 10% return on a (essentially risk-free) government bond in the current rate environment?
Quote from NasdaqTrader:
http://bonds.finance.yahoo.com/z1?b...0000&ytl=-1.000000&ytu=-1.000000&yu=-1.000000
Looking at the May 2030 zero coupon treasuries,they are currently priced at $282.50,in which you receive $1000 upon maturity.So for example with a $1,000,000 investment,you average out to $101,592 per year in interest over the 25 years,versus say $50,000 per year in interest on a 5% coupon bond.
Quote from NasdaqTrader:
http://bonds.finance.yahoo.com/z1?b...0000&ytl=-1.000000&ytu=-1.000000&yu=-1.000000
Looking at the May 2030 zero coupon treasuries,they are currently priced at $282.50,in which you receive $1000 upon maturity.So for example with a $1,000,000 investment,you average out to $101,592 per year in interest over the 25 years,versus say $50,000 per year in interest on a 5% coupon bond.
You better keep trading Nasdaq stocks and forget about bonds if you're convinced of what you just wrote !
Even yahoo has computed the YTM for you : 5.05%
according to the SEC this isn't true --Quote from H2O:
Taxes....
Interest is taxable, zero coupon bonds don't pay interest, they advance(decline) in price.
"In addition, although zero coupon bonds do not pay any interest until they mature, investors may still have to pay federal, state, and local income tax on the imputed or "phantom" interest that accrues each year."
-- and this is the main reason I can't see the value in these things
beyond keeping hands out of the cookie jar.
The primary benefit of zero coupon bonds is that there is no reinvestment of coupon risk. For longer term interest-bearing bonds held to maturity, the biggest hidden risk is reinvestment of your coupon flow. The yield to maturity calculation is actually an estimate, with the key assumption that all coupons earned during the life of the bond will be reinvested at the same yield. This almost never happens. If rates go up, you get to reinvest at higher rates, but meanwhile, the value of your bond has fallen, and vice-versa. For pension funds and life insurance companies that need to pinpoint assets to target dates to offset liabilities, and/or cannot tolerate reinvestment risk, zeros are perfect. For individuals, they make more sense in an IRA for reasons stated before. They can be great trading vehicles too, but you'd better understand the dynamics of how they are priced vs. the yield curve, or you can get burned.
is accurate.
H2O - please don't give tax advice without thoroughly checking it.
H2O - please don't give tax advice without thoroughly checking it.
Quote from BA_Trader:
according to the SEC this isn't true --
"In addition, although zero coupon bonds do not pay any interest until they mature, investors may still have to pay federal, state, and local income tax on the imputed or "phantom" interest that accrues each year."
-- and this is the main reason I can't see the value in these things
beyond keeping hands out of the cookie jar.
I'm no US citizen....
Where I live (Europe), this is how the situation used to be : interest is taxed, but capital gains are not.
At the moment a new system is in place,
We only pay 1.2% taxes (regardless of the return we make) on our accounts. (Of course this is different if you're a trader (tax status) In that case you will pay income taxes on your gains)
Hope this helps