billr@ISM780B.UUCP (11/20/85)
I am interested in investing in zero-coupon bonds, however they are a relatively new form of investment and are not covered in many investment reference guides. I would like to know how (if) one may find them listed in a typical newspaper business section, how to evaluate their purchase price and risk, tradeoffs between corporate bonds and "STRIPS" - government backed zeros. Your comments and advice are most welcome. ARPA: RIZZI@ISIB UUCP: decvax!cca!ima!ism780b!billr
billr@ISM780B.UUCP (12/10/85)
I am interested in zero-coupon bonds but have no idea how to
find them listed in the average newspaper business section. I would
also like some information on how to evaluate them for relative safety
and return. Any pointers to reference material are also welcome.
Thanks,
Bill
ARPA: RIZZI@ISIB
UUCP: cca!ima!ism780B!billrmat@amdahl.UUCP (Mike Taylor) (12/14/85)
> > > I am interested in zero-coupon bonds but have no idea how to > find them listed in the average newspaper business section. I would > also like some information on how to evaluate them for relative safety > and return. Any pointers to reference material are also welcome. > I haven't seen much in the way of bond listings in regular newspapers. I user Barron's. Zero-coupon bonds are listed in with the regular bond listings - the coupon rate is zero and they usually are designated "zr." They are rated by the bond services (Moody's, etc.) for safety and return is easily calculated, by seeing what rate discounts the bond's face value over its remaining term to its current price. Many calculators will do this directly. -- Mike Taylor ...!{ihnp4,hplabs,amd,sun}!amdahl!mat [ This may not reflect my opinion, let alone anyone else's. ]
franka@mmintl.UUCP (Frank Adams) (12/16/85)
In article <2384@amdahl.UUCP> mat@amdahl.UUCP (Mike Taylor) writes: >> I am interested in zero-coupon bonds but have no idea how to >> find them listed in the average newspaper business section. I would >> also like some information on how to evaluate them for relative safety >> and return. Any pointers to reference material are also welcome. > >I haven't seen much in the way of bond listings in regular newspapers. >I user Barron's. Zero-coupon bonds are listed in with the regular bond >listings - the coupon rate is zero and they usually are designated "zr." >They are rated by the bond services (Moody's, etc.) for safety and >return is easily calculated, by seeing what rate discounts the bond's >face value over its remaining term to its current price. Many calculators >will do this directly. Just one additional note. As with any bond, there are two sorts of risk associated with zero-coupons: the issuer's reliability, and the market risk. The latter is a function of interest rates: when rates go down, the value of you bond goes up, and vice versa. This risk is much larger for a zero coupon than for other bonds. A zero coupon can halve or double in value relatively easily. The amount of this risk depends on the time to maturity: the longer to maturity, the more volitile. Reliability of the issuer is a bit more important for a zero as well. If the issuer of an ordinary bond goes under, you at least have the coupons collected before this happens. With a zero, you have nothing. Especially never buy a zero-coupon except from a reliable broker, issued by a well-known company or governmental body. This is good advice generally, but especially important with zero-coupons, since anyone trying to pull something has a few decades to get away with it in. This is less of a problem in the U.S., but a number of European banks discovered that they had lots of counterfeit zero-coupon bonds on their hands. Frank Adams ihpn4!philabs!pwa-b!mmintl!franka Multimate International 52 Oakland Ave North E. Hartford, CT 06108
art@ucla-cs.UUCP (01/03/86)
> > > > > > I am interested in zero-coupon bonds but have no idea how to > > find them listed in the average newspaper business section. I would > > also like some information on how to evaluate them for relative safety > > and return. Any pointers to reference material are also welcome. > > The LA Times has a bonds column in its business section taken from the wires of AP. Zero coupon bonds are mixed in with the rest of the bonds. The name of the company issuing the bond is followed by a zr and the year of maturity. The price of the bond is the amount you pay for 100 dollars at maturity. On Jan 2 the paper listed 1985 high, low, close and sales of bonds, including zc's. ANybody know if the date is Jan. 1 for all zc's, or some other date? This is impt. for bonds that mature soon. Arthur Goldberg art @ ucla-cs 213 820-6081
misha@daisy.UUCP (Mike Umansky) (03/06/86)
I need help with understanding zero-coupon bonds. I would like to know how much of federal zero-coupon bonds do I have to buy now to get $100,000.00 at its 10 year maturity. I would also like the same info for 5 year maturity. Also, is there a formula that I can use to calculate the return of these bonds based on initial purchase value and maturity time?? Also, what about tax implications at the time of purchase and the time of getting cash back after maturity. What am I liable for in both instances??? Any help is greately appreciated!!! -- -- NAME: Michael Umansky (misha) E-MAIL: ucbvax!hplabs!nsc!daisy!misha WORK: Daisy Systems Corp. 700B Middlefield Road Mountain View, CA 94039-7006 (415) 960-7166 (work) HOME: 94 Cassia Ct. Hayward, CA 94544 (415) 886-4805 (home)
ekrell@ucla-cs.UUCP (03/08/86)
one problem with zero coupon bonds (besides them being more volatile to
interest rate changes than most other bonds) is that, as I understand it,
you pay taxes for the interest the bond yields even though you don't get
a penny of that money until maturity. Could be a bad deal.
--
Eduardo Krell UCLA Computer Science Department
ekrell@ucla-locus.arpa ..!{sdcrdcf,ihnp4,trwspp,ucbvax}!ucla-cs!ekrellgordon@cae780.UUCP (Brian Gordon) (03/10/86)
In article <9725@ucla-cs.ARPA> ekrell@ucla-cs.UUCP writes: >one problem with zero coupon bonds (besides them being more volatile to >interest rate changes than most other bonds) is that, as I understand it, >you pay taxes for the interest the bond yields even though you don't get >a penny of that money until maturity. Could be a bad deal. Which is, of course, why they are most often recommended for IRAs, which are all tax-deferred anyway ...
franka@mmintl.UUCP (Frank Adams) (03/11/86)
In article <150@daisy.UUCP> misha@daisy.UUCP (Mike Umansky) writes: >I need help with understanding zero-coupon bonds. >I would like to know how much of federal zero-coupon bonds >do I have to buy now to get $100,000.00 at its 10 year maturity. >I would also like the same info for 5 year maturity. Since bonds, including zero coupons, are also quoted in terms of par value, the answer in either case is that you need to buy $100,000 of bonds. Of course, you need to know the current price of the bond in order to know what this will cost you. >Also, is there a formula that I can use to calculate the >return of these bonds based on initial purchase value and maturity time?? If y is the yield expressed as a fraction (e.g., 8% is .08), P is the par value, C is the current value, and n is the number of years to maturity, then P C = ----------- n (1+y) (This is actually an approximation, but it is close enough for most purposes.) Solving for the yield, we get: (1/n) y = (P/C) - 1 This is not easily computed on a four-function calculator, but should be no problem if you have access to a computer (a reasonable assumption). >Also, what about tax implications at the time of purchase and the time >of getting cash back after maturity. What am I liable for in both >instances??? Any help is greately appreciated!!! I believe, under current law, you are liable for taxes every year that you own the bonds, even though you are recieving no payments. At one point, the taxable income was computed by linear interpolation from the price you paid (in other words, if you paid $5,000 for a bond with a $10,000 par value maturing in ten years, you were taxed on $500 per year). Today I think a formula closer to current value formula above is used. (However, the critical date is the date the bond was issued, not when you bought it.) I would recommend talking to an accountant before you purchase a zero-coupon bond in a taxable environment. Frank Adams ihnp4!philabs!pwa-b!mmintl!franka Multimate International 52 Oakland Ave North E. Hartford, CT 06108
stern@tilt.FUN (03/11/86)
Here's a little on zero coupon bonds:
1. What They Are
A zero coupon bond (or zero for short) is a bond that pays no interest to you
during its life. When it matures, you get the face value of the bond from
the issuer. As a result, they are priced with an implicit yield -- the bond
sells at a deep discount. To figure out how much a zero coupon bond is yielding,
consider that the yield is the equivalent rate of compound interest your money
would earn if invested elsewhere. If you invest X dollars for N years at R%
yearly interest, then after the N years you have:
X' = (1+R)^N * X
Example: invest $100 in a 5% checking account for 2 years. In 1988 you'd have
100 * (1.05)(1.05) = $106.25
To determine the yield of a zero-coupon bond, you have X' (the face value of
the bond), you know X (the price you pay for it), and you know N - the number
of years until maturity. Plug into the equation above and solve for R. Most
zeros are yielding 9-9.5% right now.
2. Where They Come From
Zeros are issued by corporations (Allied Chemical has lots) or through brokers.
Some corporations will issue them to get some cash now without having to service
the debt for 15-20 years. Later on, they can just pay off the bonds in one
shot. The Allied Chemical zeros due in 2006 or so are going for about $130 each
right now. The other source of zeros is brokers, who sell them as CATS or STRIPS.
CATS stands for Certificates of Accrual on Treasury Securities; STRIPS is
something similar (Treasury Receipts for Interest....whatever). As you can
guess, brokers bundle up treasury securities (T-bills and the like) and then
pull off the coupons. They sell you a certificate representing the bare bond,
with no coupons attached -- they also collect the coupon interest every 6 months.
CATS and STRIPS are usually $1,000 face value bonds and a 20-year zero now
sells for about $230-$250. Zeros traded on the NYSE are listed in your favorite
financial paper with other NYSE bonds. They are usually marked zr where the
yield/maturity go in the listings. The prices listed are per $100 face value,
so multiply by 10 for a $1,000 bond.
3. How to Have $100,000 in 5,10,20 Years
If you want $100,000 in 5 years, buy 100 $1,000 face value zeros due in 1991.
This will probably run you $60,000 plus commissions. For $100,000 in 20 years,
buy 20-year zeros, which would be about $22,000. You can tell what the bonds
will be worth at maturity quite easily: it's the face value.
4. Things to Remember
A. The Feds tax implied interest
The goverment will make you pay taxes on the "interest" your money earned
implicitly while you were holding the zero. The implicit interest is usually
reflected as a change in the market value of the bond, but there are explicit
formulae for determining it. Zeros are best purchased for (a) your kids,
who won't pay taxes on that small amount of interest (b) your IRA, where
the interest isn't taxed.
B. Brokers who sell you STRIPS may hide commissions
Most brokers bundle commissions into the cost of the zero coupon bond.
They'll quote you $260 for a 20-year zero, which may include $30 of their
commission. When calculating your return, include their commission, not
just the price listed in the bond section of the paper. Some brokers say
"we don't charge you commission on the bond" and they're right -- they
just set a higher price for the securities they package and sell.
C. Rising interest rates hurt zeros badly
Zeros are priced to yield market rates plus a small premium. If rates
go up, the market price of your zeros will go down so that the implied
yield increases to the current market yield. The effect is much more
pronounced with zeros than it is with regular bonds. As an example of
this effect in reverse, look at the Allied Chemical zr06: it came out
at about $90, and shot up to $135 when interest rates slid just a little.
A nice 50% gain for people who bought into them.
--Hal Stern
Princeton University
{ihnp4, seismo, allegra}!princeton!stern4373jml@homxb.UUCP (J.LISS) (03/13/86)
It is my understanding that unless the bond pays signigicantly more than other saving media it is of now tax advantage. I have purchased 4 zero coupons bonds for my sons education and will do like wise when I have another child. I have been told by Shearson Lehman, that every year I will have to file a return for him, (the bonds are in both our names, his ss #). The return will indicate the earned interest for the year even though we didn;t collect any of it. At some point I will have to start paying income tax for him. I beleive zero coupon bonds are an excellant vehicle for those that want security and save for a childs education. I don't see any other reason for it.