Zero Coupon Bond Funds vs Conventional Bond Funds

If you want to get involved in the bond market without investing directly in the market, you could invest in zero coupon bond funds or in conventional bond funds. Even though these two types of funds are similar, they have a few key differences. Here are a few things to consider about zero coupon bond funds versus conventional bond funds.

Interest Payments

With a zero coupon bond, the investor is not going to receive any regular interest payments. Instead, they are simply going to get a bond that has increased in value when it is time to redeem it. Because of this, if you invest in a zero coupon bond mutual fund, you are not going to get regular interest payments. With a conventional bond fund, you are going to be able to get interest payments regularly.

Fluctuation

Bond values have an inverse relationship to interest rates in the market. With zero coupon bond funds, this relationship is going to be accentuated. When interest rates decline, zero coupon bond funds are going to appreciate in value rapidly. When interest rates in the market increase, zero coupon bond funds are going to decline in value rapidly. Conventional bond funds are not going to fluctuate quite as much.

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