Zero Coupon Treasury Bonds Performance Review

Zero Coupon Treasury Bonds

Zero coupon treasury bonds are considered an excellent investment by many investors but how have these bonds performed and why are they so popular? Zero coupon bonds have a discounted purchase price and these securities do not pay interest payments before the maturity date of the bond. Investors who are interested in zero coupon municipal bonds and other bonds of this type pay less than the full face value of the bond. When the maturity date is reached then the bond is redeemed for the full face value, and this is the point where the investor receives the interest that has accrued in the form of the full value of the bond. Zeros are created when the interest coupons of the security are separated or stripped from the principal body of the security and each of these are sold individually.

The performance of zero coupon treasury bonds has been stable since these bonds were first introduced, and while the yield and gains experienced may not be as high as corporate bonds there is also much less risk involved as well. Because many individuals are interested in investing in government bonds with capital that can not be placed at a high degree of risk, such as retirement funds, there is a high degree of liquidity with these options. Investors also do not face any tax liabilities from annual or semi annual interest payments because zeros do not pay periodic interest. Instead the investor is assessed the tax liability when the bond matures, and the accrued interest is paid all at once.

The duration of zero coupon bond plays a role in the performance of the bond, but the difference in performance between various durations is not significant. These bonds perform well but investors do not expect huge gains, because these are considered conservative investments that help protect against losses. A performance that is steady and that offers decent gains is what makes zero coupon treasury bonds such a popular option with investors. The discount offered on the face value of the bond is tied to the interest rate and economy of the nation. When interest rates are high these bonds will have steeper discounts on the purchase, and when interest rates are low the bonds will have a higher cost and less of a price discount.

Zero coupon treasury bonds have historically performed well considering that these investments are viewed as safe and conservative. The interest rate offered is smaller than corporate bond rates for the same time period but the additional capital safety and protection provided makes up for the smaller yield. Some high risk investors may use a zero coupon bond calculator and determine that the yield is not high enough for the term of investment. Many choose these bonds for retirement portfolios and other capital that can not be placed at high risk because the funds will be needed in the future. Zeros are like the tortoise, the performance is slow and steady but in the end results are achieved.