Treasury zero coupon bonds are those that do not offer periodic interest payments, rather these bonds are sold below par and redemption is done at par or face value. The difference between what one paid and the face value is the return. The returns from Treasury zero coupon bonds may be taxed if the coupons are not held in a qualified plan.
Treasury Zero Coupon Bonds: Advantages
The values of Treasury zero coupon bonds will fluctuate based on the changes in the interest rates. If you sell these bonds before maturity, there are chances that you incur a loss.
Zero coupon bonds offer you with stable income and predictable return if you hold them until maturity. This means that Treasury zero bonds are risk-free only if you hold them until the maturity period.
In terms of bonds that offer periodic interest income, the interest income should be reinvested at the prevailing interest rates but on the understanding that these rates can fluctuate.
With Treasury zero coupon bonds, you need not worry about reinvestment risks. The treasury zero coupon bonds, also called as ‘Zeros,’ are very useful to plan your future. Suppose you want to invest for your kid’s educational need for 20 years, you can buy zeros that will be due in 20 years. This way, you will know certainly know how much amount you will get and plan the future accordingly. Moreover, you need not worry about the fluctuation in interest rates.
Treasury Zero Coupon Bonds - CATS and TIGRS
The following securities are similar to Treasury zero coupon bonds, namely,
- CATS (Certificates of Accrual on Treasury Securities)
- TIGRS (Treasury Income Growth Receipts)
A major difference is that while the US government issues the treasury zero coupon bonds, CATS and TIGRS (pronounced as Tigers) are issued by specific investment banks.
Treasury zero coupon bonds are risk free because they are guaranteed by the US Government and insured by the FDIC (Federal Deposit Insurance Corporation). You can use them as a good planning tool. Their maturity period ranges from one to 30 years. These are easier to buy since the bond prices are much lower than face values. This can be a good addition to your retirement portfolio.