Newspaper article THE JOURNAL RECORD

Zero Coupon Bonds among Safest Investments / Some Professionals Not Impressed by Zeros' Discount Feature

Newspaper article THE JOURNAL RECORD

Zero Coupon Bonds among Safest Investments / Some Professionals Not Impressed by Zeros' Discount Feature

Article excerpt

Zero coupon treasury bonds can be a secure, profitable harbor for your money in a stormy market. Backed by the full faith and credit of the U.S. government, zero coupon bonds, also called treasury ``strips,'' are among the safest investments available today.

Because of the way they work, strips are particularly worth investigating if you know you will be needing a lump sum of money on a given date - for college expenses, retirement or the like.

Straight treasuries are purchased at face value and redeemed at face value when held to maturity. During this time, they pay coupon interest twice a year.

Zeroes are purchased at a deep discount from face value. Interest is not paid out in periodic payments, but instead accrues over time. At the specified maturity date, zeroes are redeemed at face value.

Thus, zeroes are said to be ``stripped'' of their coupons. For any given face value and term of maturity, the purchase price is determined by the bond's yield (or rate of interest) on date of purchase.

``Treasury strips usually outperform straight treasury bonds by 15 to 50 basis points,'' reports Kenneth Witover, senior vice president for private investments at Shearson Lehman Hutton.

Investors are attracted to zero coupon treasury bonds because of their predictability, fixed rate of interest and maturity at a known value. Long-term maturities can grow to more than ten times their purchase price. What's more, they are available in denominations as small as $1,000.

``They're safe, inexpensive, compound at double-digit interest, offer a range of maturities from three months to 30 years, and accumulate sizeable sums,'' says Richard M. Bookstaver, head of the bond department at Adler Coleman & Company, a Wall Street brokerage firm.

The discount or ``leveraging'' feature of zeroes is particularly attractive to some small investors. When you purchase a $10,000 straight treasury bond, you pay the full $10,000. The same face value in a zero coupon bond, assuming it matured in November of the year 2000, would cost you about $3,500 at current rates of interest - a difference of $6,500.

Some investment professionals, however, are not impressed by the discount feature of zeroes. …

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