zero coupon bonds

No only are zeros more sensitive to interest rates than a comparable coupon bond, but they have higher convexity. This means that when interest rates move lower you will make more money than when you hold a bond that is less convex, and when interest rates move higher you will lose less money than when you hold a bond with less convexity.
 
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.
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One year later and they are at $336.10,for a return of 19%...better than most fund managers.
 
In times of deflation, zero coupon bonds are superior than regular coupon paying bonds. Typically the gains are 50% higher. The reason is because they are more leveraged to interest rate changes.
In inflationary times, there are not that hot.:)
 
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