Coupon Pass

Finance allah shmoop What are the tax implications of zero

coupon bonds All right well from the investors side you

think that a zero coupon bond would simply have attacks

being paid when the bond and interest payments fully mature

a goal that we hear it shmoop clearly have not

yet achieved That is you buy a zero for half

or two thirds or three force of its par value

and something like that You get no interest or any

payments of any kind along the way for years But

then at the end you get par like three thousand

box or whatever amount of the zero yabba like you

spent two grand and it matures and pars three grand

cause he had three bonds and then you're done well

At that point you pay a tax right and you

think it might be assessed as a long term game

kind of tax because you bought and held it over

a year just like you would have you bought in

equity and held it on five six seven years and

then sold it some gain At that point in an

equity you'd be taxed the long term gains cheaper tax

treatment iaea You know when you sold and turned into

cash but oh so not the case with zero coupon

bonds instead with zero coupon bonds taxes are paid on

the annual imputed maturity of the bond itself such that

if you paid say five hundred bucks for a zero

coupon bond matures with all payments included at a thousand

dollars five years later well you'd be paying tax on

an imputed gain of one hundred bucks a year which

would comprise basically a bundled gain of notional principal gagne

plus whatever imputed interest was included in the bond And

that is tax as ordinary income not long term game

that is you pay the higher tax rate because well

it's a bond and its interest on the bonds you're

paying on so things air re calculated annually And that

hurts So you don't really own anything for more than

a year before uncle sam comes by tio you know

pick your pocket You actually lose cash along the way

with zero coupon bonds and then get a whole bunch

Each of it vomited back to you at the end

On top of everything zeroes are riskier than normal bonds

because they pay nothing along the way and well all

bets iran that they eventually pay off fully at the

end But you know you never know So given everything

you'd better be sure you're getting a big premium for

buying a zero coupon bond over a normal one If

you do some day you want to go in this 00:02:19.8 --> [endTime] direction you know putting your nuts to work