Zero Coupon Bonds

Zero coupon bonds (or STRIPS) are bonds that you can purchase at a deep discount and redeem at a set date (maturity date) at face value.

These bonds compound semi-annually at the corresponding yield that you lock in at the time of purchase. Unlike other bonds, zero coupon bonds do not pay interest regularly.

Zero coupon bonds offer the following features:

  • Safety – Your investment is backed by the full faith and credit of the issuer as to the payment of the face amount at maturity.
  • Small initial investment – A small investment today can grow into a large one over time.
  • Market value fluctuations – As interest rates change, the market price of zero coupon bonds changes.
  • Liquidity – You can sell zero coupon bonds at their market value at any time before the maturity date.
  • Phantom income – You must pay taxes on the "phantom income" or "accreted value" each year that you own a zero coupon bond.

Rates

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