Zero Coupon Municipal Bonds

Municipal bonds are popular among investors and who are looking for long term investments. Interest payments are paid semiannually and at the end of the bond term they can be cashed in. Zero coupon municipal bonds work differently than normal municipal bonds. When investing in zero coupon municipal bonds, there are no interest payments. Instead, zero coupon bonds are paid in one single payment at the end of the bond term. Interest is compounded semiannually and added to the principle. When the investor receives there payout from the zero coupon municipal bond they receive the principal plus the interest.

One fact that makes zero coupon bonds appealing to investors is their price. They are sold at a substantial lower price than their worth. For example, $20,000 in zero coupon bonds can be purchased for around $7,000. The contract for these bonds last for 20 years. At the end of the 20 years the zero coupon municipal bond will accrue interest and be worth $20,000. The investor will make $13,000 over a 20 year period. This is the typical earnings that investors will see when they earn 5.5% interest with their bonds. Compounding interesting builds up quickly over 20 years.

Zero coupon municipal bonds paying 5.5% interest will almost double the initial investment over a 10 year period. A $7,000 investment will be worth $11,600 at the end of the 10 year period. Most investors who invest their money in zero coupon municipal bonds are not looking for monthly interest payments. Zero coupon municipal bonds are often used for retirement purposes. There are two different types of zero coupon municipal bonds that investors can invest in. These are known as “convertible zero coupon municipal bonds” and “stripped municipals.” Each of these appeals to the investor in a different way, depending on what the investor is looking for.

Convertible zero coupon municipal bonds work by compounding interest for 15 years and then they convert to interest paying bonds. These are also commonly used for retirement purposes. During the time the interest is compounding the money being made is considered tax free income. When the investor retires they can draw off their convertible zero coupon municipal bonds without having to pay taxes on the income. Any tax free capital that retirees can take advantage of helps them meet the needs of living expenses. Not having to pay taxes on income when retired is a huge advantage for everyone who invests in these kinds of bonds.

Stripped municipals pay semiannual interest payments. They can be customized by separating and adjusting the interest and the principal. They can be repackaged and be cashed in anytime, from 6 months to 40 years. Stripped municipal bonds show the same amount of discounts as zero coupon municipal bonds do. They can be bought at a fairly low price. Stripped municipals are for both long term and short term investors. They allow custom packaging that meet the different needs that people may have. Everyone doesn’t plan the same way and stripped municipals allow investors to make a plan that fits their future.

Zero coupon municipal bonds are not just for retirement planning. Although retirement is the most common reason why investors use zero coupons, they also can be used for funding an education. Parents that invest in zero coupons will be able to send their kids to college when they get older. Investing is important for anyone. Zero coupon municipal bonds allow people to plan for their future and the children’s future. The different types of municipal bonds cover the wide variety of the different future goals that people plan for. Zero coupon municipal bonds can help anyone achieve their long term or short term goals.

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