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)
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
4373jml@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.