An Argument in Favor of Zero-Coupon Bonds

Many investors stay away from zero-coupon bonds for one reason or another. However, these investments have several advantages that you can benefit from if you invest in them. Here are a few things to consider about why you should consider investing in zero coupon bonds. 

Zero-Coupon Bonds

Zero-coupon bonds are a type of bond that does not pay regular interest like traditional bonds do. With this type of bond, you are going to pay a certain amount of money for the bond when you purchase it. Then, after the bond matures, you are going to be able to cash it in for the face value of the bond. You will buy the bond at a deep discount when compared to the face value. For example, you might buy a bond for $400 and then cash it in for $1,000 when the bond matures. 

Simple

One of the biggest advantages of investing in zero-coupon bonds is that they are simple. You are not going to have to worry about reinvesting your interest or paying attention to interest rates. You simply purchase the bond and then wait until it matures. This is similar to a savings bond arrangement. If you are the type of investor that does not like to deal with their investments frequently, this is a potentially good investment for you. You are going to be able to do something one time and earn a return for many years into the future.

Known Quantity

Another big benefit of this type of investment is that you know exactly what you are going to get. You know that when you purchased a bond, you are going to be able to cash it in for the face value when it matures. With most investments, you have no idea how they are going to turn out. This provides you with a level of uncertainty in your investing. However, with the zero-coupon bond, you are going to know exactly what will happen. This makes them a great investment when you are saving with a specific objective in mind.

For example, if you wanted to save for a vacation house or college tuition, these can be great investments. You know that when they mature, you will be able to get the money that you need. If you invest in stocks or some other type of security, you are not really going to know how the investment will turn out in advance.

Safety

Another advantage of zero-coupon bonds is that they are considered to be very safe. There is a high likelihood that you are going to be able to get your money back out of this type of investment. When you are a bond holder, you are considered to be a creditor of the company that issued the bond. This means that even if the company goes out of business, you are going to be towards the front of the line to get your money back.

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