Zero coupon bonds, more commonly known as "strips" or "zeros", are fixed income securities that unlike other bonds, pay no interest until maturity. This means that instead of paying semi-annual interest like other bonds, the interest is compounded throughout the life of the bond and is paid in full upon maturity. Zero coupon bonds are ideal long-term investments for people who have a specific situation, which calls for a specific amount of money to be acquired at a future date, mainly ten to twenty years in the future. These bonds offer a great variety of benefits that are attractive to investors who are looking for more of a long-term investment. They also pose a few drawbacks, but are outweighed by their advantages which make them a sound investment.
Zero coupon municipal bonds combine the benefits of the zero coupon instrument with those of tax-exempt municipal securities and offer the following advantages:
Low Minimum Investment
The first thing that comes to mind when investing in zero coupon bonds is its low initial investment. Zeros are sold at a deep discount relative to other bonds and therefore can be purchased with a low minimum investment. Investors purchase zeros for much less than their face value, which is typically in increments of $5000, however, zero-coupon bonds with face values of $1000 are also sold. The greater the number of years a zero-coupon bond has until maturity, the less an investor has to pay for it. The reason of such a low initial investment is another benefit of zeros, compounded interest. The small initial dollar outlay makes zeros attractive investments for many investors. It allows investors to put aside a modest amount of money today and know exactly h ...