Benefits of Zero Coupon Bonds
Zero coupon bond offer unique features to help you reach the desired financial goals. It is however advisable to use caution as they require one to pay high taxes. Zero coupon bonds in layman terms refer to a type of bond that does not offer regular interest payments. Zero coupon bonds are popular with investors and traders who need to use their funds at a later date. Listed below are the benefits of zero coupon bonds.
Traders and investors often bank on zero coupon bonds as they can access their money at a future date. Since such bonds offer interest at a discounted price, traders no longer have to capitalize the interest. In addition to that, zero coupon bonds have great price changes the moment interest rates rise. Bond prices usually increase the moment interest rates fall.
2. No interest payments
Zero coupons are flexible since they don’t have interest payments. In fact, this is the main reason they are popular with traders and investors. Instead, they provide a discounted price at a later date when you decide to withdraw the funds. A traders earning is the difference you get from the price of the coupon and the amount received after the bond ripens.
3. Hold until maturity
The main perk of availing zero coupon bonds is that they keep funds until maturity. Investors use these coupons as a protective measure against the ever changing stock market. An additional benefit is that zero coupon bonds are robust as compared to regular coupons. If you want to buy bonds, the prevailing interest rates will dictate its worth.
Although zero coupons fall in value when interest rates rise, they are flexible when compared to other types of investments. In case interest rates rise, traders have to hold their bonds until maturity to avoid selling at a loss.