Zero-Coupon Bonds

Zero-coupon bonds (“zeros”) represent a type of bond that does not pay interest during the life of the bond. Instead, investors buy these bonds at a steep discount from the “face value” (the amount a bond will be worth when it matures). When the bond matures, investors will receive single payments equal to their initial investments plus the accrued interest.

Available in the secondary market and issued by the U.S. Treasury, corporations, and state and local government entities, zeros typically have long maturity dates, such as 10, 15, or more years. The initial price of a zero depends on the number of years to maturity, current interest rates, and the risk involved. For example, a zero-coupon bond with a face value of $5,000, a maturity date of 20 years, and a 5% interest rate might cost only a few hundred dollars. When the bond matures, the bondholder receives the face value of the bond ($5,000 in this case), barring default.

The value of zero-coupon bonds is subject to market fluctuations. Because these bonds do not pay interest until maturity, their prices tend to be more volatile than are bonds that make regular interest payments. Interest income is subject to ordinary income tax each year, even though the investor does not receive any interest until the bonds mature.

The return and principal value of bonds fluctuate with changes in market conditions. If sold prior to maturity, a bond may be worth more or less than its original cost.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2012 Emerald Connect, Inc.

Securities and Advisory services offered through Royal Alliance Associates, Inc. member FINRA/SIPC and a registered investment advisor. Advisory services also offered through Key Financial, Inc. a registered investment advisor not affiliated with Royal Alliance Associates.

The Advisors at Key Financial Inc., are Registered Representatives of and offer securities products & services through Royal Alliance Associates, Inc. Member FINRA/SIPC, a registered broker-dealer. In this regard, this communication is strictly intended for individuals residing in the states of California, Delaware, Florida, Georgia, Illinois, Indiana, Maryland, Massachusetts, Nevada, New Jersey, New Mexico, New York, North Carolina, Pennsylvania, South Carolina, Texas and Virginia. No offers may be made or accepted from any resident outside the specific states referenced.

The advisors at Key Financial Inc., are also separately registered as an investment advisers under Key Financial Inc., a registered investment adviser, offering advisory services in the state of Pennsylvania. As such these services are strictly intended for individuals residing in Pennsylvania.

Important Consumer Information:
A broker-dealer "BD", investment adviser "IA", a BD agent, or IA Representative may only transact business in a state if first registered in that state, or is excluded or exempt from registration in that state as a broker-dealer, investment adviser, BD agent or IA Representative, as appropriate. Follow-up, individualized responses to persons in a state by such a firm or individual that involve either affecting or attempting to affect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made without first complying with appropriate registration requirements, or an applicable exemption or exclusion.

For information concerning the licensing status or disciplinary history of a broker-dealer, investment adviser, BD agent, or IA rep, a consumer should contact his or her state securities law administrator.