Zero coupon bond risk
Also, zeros may not keep pace with inflation. And while there is little risk of default with Treasury zeros, default risk is something to be mindful of when researching and investing in corporate and municipal zero-coupon bonds. One last thing you should know about zero-coupon bonds is the way they are taxed.
The difference between the discounted amount you pay for a zero-coupon bond and the face amount you later receive is known as "imputed interest. Therefore, the IRS requires that you pay tax on this "phantom" income each year, just as you would pay tax on interest you received from a coupon bond. Learn more about our updates.
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The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite. Investors seeking world investments can choose between global and international funds. What's the difference? How Does It Work? Those bonds are issued at a deep discount and repay the par value at maturity.
There is no coupon payment, hence the name. That earned interest is taxable imputed interest at an estimated rate.
A zero coupon bond allows for a larger return than a regular bond once the bond matures. The U. Even though you can earn more because you purchased the bond at a reduced rate, they do carry some risk.
What are Zero Coupon Bonds? Who Should Invest in Them?
If interest rates rise, the value of zero coupon bonds can fall. If you sell before maturity, they are subjected to interest rate risk. Zero coupon bonds, just like other bonds and securities, carry risk.