|
These bonds are called zero coupon as the investor does not get any interest during the term of the bond. The interest is accrued and when the bond matures, the investor gets the face value of the bond, which is the initial amount paid for the bond and the interest that has accrued over the life of the bond. The payment is a lump sum payment. Although the investor does not see the interest, he still has to pay taxes annually on the assumed interest.
Zero coupon bonds are ideal for investors who are saving for a specific event that will happen at a specific time like purchasing real estate. You can buy a zero coupon bond so that it matures just before you need the money to make down payment on your home. This is because zero coupon bonds increase in value as they are reaching maturity.
When you buy a zero coupon bond, you know what interest you will get during the term of the bond. This means you will know the amount you will receive in total when the bond matures and this allows you make your plans accordingly. If you lock in the interest when interest rates are high, you will definitely benefit from purchasing a zero coupon bond.
When people are planning to buy real estate, zero coupon bonds is a good investment. As the money will be kept aside and you know you can make a balloon payment on your final mortgage payment or you can even make a down payment on a home. You will have the benefit of knowing the amount of money you will receive as you locked in the interest rate at the time of purchasing the bond.
More Articles :
|
|