spend 7,500 right now and be assured that it will grow to the needed amount over the next 10 years. Unique Tax Implications, still, zero-coupon bonds have unique tax implications that investors should understand before investing in them. For Treasuries, that would come in two san marcos ca bowling coupons semiannual payments of 15 each, but the frequency with which issuers pay interest can vary from bond to bond. The Motley Fool has a disclosure policy. There are two very different reasons why various investors like zero coupon bonds. Taxes must be paid on these bonds annually, even though the investor does not receive any money until the bond maturity date. Specifically, if rates rise, they make the value of your zero coupon bond go down, potentially forcing you to sell at a depressed price if your timing is bad. If current interest rates were to rise, giving newly issued bonds a yield of 10, then the zero-coupon bond yielding.26 would not only be less attractive, it wouldn't be in demand at all. Newly-issued bonds tend to have coupon rates that match or exceed the current national interest rate. So, for instance, if you spent 750 on a 10-year 1,000 zero coupon bond, then the fact that the bond was priced to yield around 3 would mean that you'd have to pay tax on 3 of its value each year, which would slowly rise.
This is a normal bond: It has 6 coupon payments and one principal repayment. Another group of investors likes zero coupon bonds because of their sensitivity to rate changes. For instance, a 10-year Treasury bond might have a coupon rate of 3, meaning that each 1,000 face-value bond will make interest payments totaling. In other words, they have only one big cash flow at the fag end of the maturity. The gain in value is not taxed at the capital gains rate but is treated as income. As you can imagine, investors aren't willing to pay the same amount for a zero coupon bond that they would for a bond that pays interest. Zero coupon bonds work a bit differently. Investing, bonds / Fixed Income, at first glance, the inverse relationship between interest rates and bond prices seems somewhat illogical, but upon closer examination, it makes good sense. Further, there is limited liquidity for zero coupon bonds since their price is not impacted by interest rate changes.