Last week in the investment series, we were on the subject of unit investment trusts, however, this is the end of the road as far as our alternative investment series goes. This is the last type of alternative investment strategies we’ll be looking at!
We’re going to end today by looking at one particular type of security that is popular because of its safety and predictability – the Zero Coupon Security.
Zero Coupon Securities – Safe And Predictable
Often referred to as a stripped bond, the zero coupon security is, as the name suggests, a bond that has had the regular paying coupons removed. Essentially, regular bonds are “zeroed out”, and then these zeroed out bonds are traded as their own individual securities.
Think of it this way, a bond is already split into two parts – the principal, and the interest, or “coupons”. When a Zero Coupon Security is sold, it’s essentially just the various coupons on a bond being bundled together with that bond’s residual and then sold as its own unit.
The reason this is a secure investment strategy is because you’re essentially paying a certain amount in exchange for the security of receiving a certain amount at a later date. In other words, like a bond or treasury bill, you know up front what you’ll be getting at the maturity date, which makes this a great investment type for those who like to play it safe.
The one risk with a Zero Coupon Security, however, is that the accruing interest is considered income. This means that while you won’t receive a pay out until maturity, you’ll have to pay income tax every year of the life of the security, on whatever interest it happens to gain.
We hope you have enjoyed this 18 part series on alternative investments, we will see you next week for a new 7 part series, where we look at some of the worst and most common mistakes that people make when dealing with stocks.
Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 – 2009
{ 2 comments… read them below or add one }
Hi Sean,
A zero coupon security seems like a good idea because you know how much you’ll be getting at the maturity date. The only bad thing is you have to pay tax on the interest it earns.
Still, it seems like another solid long term strategy for making money while playing it safe.
I think Zero Coupon Securities sound OK. We have to pay tax on our wages and this is passive income, you don’t have to do anything physical for it.
If you are a full time investor maybe you can offset your tax somehow. Yes, I don’t mind these at all.