Taxes on zero coupon treasury bonds

What are Zero Coupon Bonds? Who Should Invest in Them?

Further, tax-exempt zero coupon municipal bonds earn interest that, in many cases, is also free from state and local taxes. Certain out-of-state municipal bonds may be taxable at the state level.

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Check with your tax attorney or advisor. In contrast, taxable zero coupon bonds are taxed each year on the amount of interest that has accrued for that year even though the accrued interest is not actually paid to investors in that year. Because they are sold at a substantial discount from face amount, you can purchase more zero coupon bonds for your money than other types of bonds. The greater the number of years a zero coupon bond has until maturity, the less you have to pay for it.

What is a zero coupon bond?

Zero coupon bonds allow investors to invest a modest amount of money today and know exactly how much money they will receive on a specified future date. Zero coupon municipal bonds provide investors with the opportunity to lock in a particular rate of return, without having to worry about reinvestment risk or interest rates in the future. Investors in securities that pay interest semiannually may not always achieve a total realized compounded yield equal to the quoted yield to maturity they expected when they purchased their holdings. Past performance does not guarantee future returns.

Price Swings

Zero-Coupon Bonds Zero coupon bonds are bonds that do not pay interest during the life of the bonds and are backed by the full faith and credit of the United States government. Features of Zero Coupon Bonds Credit Safety — Zero coupon treasury bonds are backed by the government who guarantees payment of face amount of the bond at maturity. Tax Advantage — Zero coupon treasury bonds are state and local tax-free.

Zero Coupon Bonds

Minor Initial Cash Investment Required — A relatively small investment today could grow to a large investment over time. Market Value Fluctuations — The price of zero coupon treasury bonds fluctuates with changes in interest rates. Share on Social Media:.

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