What Are Zero-Coupon Municipal Bonds?

Zero coupon bonds are bonds that do not pay interest. Bondholders are usually paid face value at maturity. Investors make a profit by buying at a discount on the face value of the bond. The difference between the face value and the price of the zero coupon bond is equivalent to the interest received by the investor during the bond holding period. These bonds can be discounted at the time of issuance, or a bank can remove coupons and package them into zero coupon bonds for issuance. Common zero-coupon bonds, such as US short-term Treasury bonds, and multiple zero-coupon bonds that are obtained by dealers by dividing the interest and principal of ordinary long-term bonds. Multiple zero coupon bonds can also be combined into the same cash flow as ordinary long-term bonds. ^[1]

Zero coupon bond

Common Zero Coupon Bonds such as U.S.

Bonds are divided into coupon bonds and zero coupon bonds. Coupon bearing bonds refer to bonds that pay interest regularly before maturity and repay the principal at maturity; zero coupon bonds refer to the payment of interest and repayment of principal at one time at maturity Gold bonds. Because coupon-bearing bonds pay interest regularly, investors need to reinvest interest at varying rates after each time they receive interest, making it difficult to guarantee a fixed amount of principal and interest at the maturity of bonds; At the time of maturity, one payment of interest and repayment of the principal, the investor can get the determined principal and interest at the expiration of the coupon. Therefore, if investors want to guarantee returns, the easiest way is to invest in zero coupon bonds.

To invest in zero coupon coupons, investors can choose zero coupon corporate bonds. But invest

In addition to the regular zero coupon bonds issued by companies and government agencies, there are a variety of zero coupon bonds. In order to meet the investment needs of retirement accounts, some brokerage companies have created derivative zero-coupon bonds. They are called derivative bonds because they are derived from other basic bonds.

(I) Zero-coupon bonds

In previous chapters, we discussed mortgage-backed bonds. Today's mortgage zero-coupon bonds are similar to mortgage-backed bonds, and they also provide guarantees. These zero coupon bonds can be secured by other bonds and real estate mortgages. Like other types of mortgage bonds, zero-mortgage bonds also have the risk of early repayment. In other words, these mortgage zero-coupon bonds also face the risk of prepayment before maturity.

(Two) municipal zero-coupon bonds

These bonds originated in the United States and were issued by the municipal or state government. The advantage is that they can be exempt from federal income tax and state income tax with their accrued interest.

There are two types of municipal zero coupon bonds: one is a general liability zero coupon bond issued by a state government; the other is a project zero coupon bond issued by a highway, public energy project, municipal drainage system, and other municipal projects. Ordinary liability zero-coupon bonds are guaranteed by the issuance of state tax revenue, while project bonds are guaranteed by project income. Therefore, the security of project bonds is relatively poor. ^[3]