4 Reasons to Buy a Strip Bond

A strip bond is a type of debt instrument that has been broken up into separate components in order to create a zero-coupon bond. These investments are created by investment firms that seek to provide the principal protection of a bond with the capital appreciation of a riskier investment like a stock. With this type of bond, the company can sell the interest payments and the principal to separate investors. This type of investment can provide a number of advantages to the investor. Here are a few reasons to buy a strip bond.

1. Low Reinvestment Risk

One of the primary reasons to consider purchasing a strip bond is that you can eliminate reinvestment risk. With regular bonds, you receive a coupon payment on a regular basis. Many investors then take the coupon payments and invest them back into the market. If the interest rates in the market are low, they will have to reinvest them back into bonds that are not paying as well as the one they have. This is known as reinvestment risk because you do not know what the rates in the market will be. With a strip bond, you do not receive any coupon payments, so you do not have to worry about reinvesting the money. All of the money from the interest payments is given to you at the maturity of the bond.

2. Low Tax

Another reason that investors might purchase this type of bond is that it can provide them with lower taxes. Regular bonds might pay a higher interest rate per year than a strip bond. Investors have to pay taxes on the interest that they receive and then at the end of the bond, they get a capital loss at the end of the bond term when they get their initial capital back. With a strip bond, the investor will pay taxes throughout the bond life at a lower rate because the yield is a little lower. They essentially get to spread out the capital loss over the entire life of the bond.

3. Specific Objectives

Purchasing a strip bond can be a good way to save money for a specific objective. If you need a certain amount of money to retire a debt or to make a purchase at some point in the future, you can purchase a strip bond now. Strip bonds sell for a major discount compared to what their value will be once they mature. You can purchase the strip bond now, it will increase in value, and then when it matures, you can get the full face value to pay for your debt or to make a purchase. Individuals could use this to save for college tuition, pay for a home down payment, or to retire a loan.

4. Simplicity

One of the best things about this type of bond is that it is very simple for the investor. As an investor, you know exactly how much it will cost you now and you know exactly how much it will be worth in the future. With most investments, you have to do a lot of speculation and guessing when it comes to determining the future value.

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