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Advice on Treasury Zero Coupon Bond

Find more information about Treasury Zero Coupon Bond at the best oniine resource site Teen Analyst.

Q: Why is a yield on a coupon bond less than a zero coupon bond if interest rates are increasing?
The answer said like the yield is an average of the spot rates. But can someone give me a more explicit explanation. I am really confused. Suppose these were like treasury bonds. and the maturity of both bonds are the same year.

A: Interest is the rate that you get for the use of your money. On a Zero coupon bond the interest never change, you have little at risk.

The interest in the market changes and the price of the bond changes with the interest in the market.

If a bond is sold at 6% interest. The Yield will drop if interest rates raise. All bonds have a face value when issued of $1,000.

The bond above will be worth $750 at 9% interest market and $1,250 at 4% interest market. If interest rates go high It is best to buy low interest bonds, they are purchased at a fraction of the face value. Then if the interest rate falls, you will benefit on the raising Yield and see no loss in the interest on your original investment.

Q: I have a zero coupon bond that came due in 2004. How can I get the money now?
It says on top that it is a “CATS” or Certificate of Accrual on Treasury Securities. It was given to me by my grandmother, and was in my fathers possession until recently. IT says the maturity date was in 2004 and I am afraid it has expired (can that happen?) How can I retrieve the funds for it?

A: Is it in your name? If so, you should be able to take it to the issuer (the company that created the strip from the treasury bond) and have it cashed.

If not, you need to do the same thing, but you will also have to bring proof that the bond belongs to you and that you have the authority to cash it. In general, you would need a form from the issuing company signed by executor of your grandmothers estate…often the form will have to have a signature guarantee.

Q: Zero-Coupon bond 30-year and phanthom interest?
So you buy a 30 year treasury with 0 coupon.
This means that you receive all the interest at the end of the 30 year term
BUT…
It means that you pay the interest yearly on your taxes as if you were collecting them.
Do I have this right?

And what is the advantage of all this?
What kind of people buy these?
What if you expect to be at a lower tax bracket when you retire – which is true of most people – I imagine.
Never can I imagine anyone being at a lower tax bracket for 30 years before they retire.
Great – now bombarded with the thought that my tax bracket will be the same or higher at retirement – thanx a lot. smile.

A: Your understanding is correct. Zero coupon bonds are sold at a discount. Amortization of that discount is implied interest which is taxable.

One advantage is that 30 year zeros have a duration of 30 years, where a 30 year coupon bond might have an effective duration of less than 10. That means that the zeros have far more leverage to interest rates. A rate drop will move the price up far more than for a coupon bond.

Most zeros are bought by tax-advantaged investors; 401k, IRA, non-profits, etc.

I would be cautious about assuming a lower tax rate in retirement. Current rates are at lifetime lows for me, and I do not expect that to continue. It is pretty easy for retirement income (pension, ssi, interest, cap gains) to put you in a top marginal tax bracket.

Q: 3 month treasury bond yield 0.01, 3 yr bond yield 3.1.3 yr bond, 3.1%anually? 3 mth, 0.01% annually?
3 month treasury bond yield 0.01, 3 yr bond yield 3.1.
what does this mean?
3 yr bond, 3.1%anually?
3 mth, 0.01% annually? unbelievablly low!

if yes, then you got principal*(1+0.01%*3/12)
(for zero coupon bonds, you pay par/(1+0.01%*3/12))
or if not, then does it mean for 3 month, you got principal*(1+0.01%)
(for zeros, you pay par/(1+0.01%)

what does it mean exactly?

thanks.

A: you’re not wrong – it really is just that low right now. the 3 months have been barely yielding anything for a while now.

Q: I am interested in purchasing some zero coupon bonds. They seem to be a good investment. The question I have i?
investment. The question I have is this: How do I read the information that I found on the web and what does it mean?

U S TREAS SEC STRIPPED INT PMT15-May-2014 As of 13-Jun-2010
OVERVIEW

Price: 93.67
Maturity Date: 15-May-2014
Yield to Maturity (%): 1.677
Type: Treasury Zero

OFFERING INFORMATION

Quantity Available: 1000
Minimum Trade Qty: 1
Dated Date: 8-Dec-2009
Settlement Date: 15-Jun-2010

A: “U S TREAS SEC STRIPPED INT PMT15-May-2014 As of 13-Jun-2010″
This refers to what are known as “strips” meaning that it was a bond that paid interest payments or “coupons” but it has had those coupons “stripped” off, leaving a bond with no coupons.

OVERVIEW

“Price: 93.67″
This is the cost of the bond as a percent of par, which is $1000.00. This bond will cost you $936.70.

“Maturity Date: 15-May-2014″
Exactly what it sounds like. On the 15th of May, 2014 this bond will mature at which point the US Treasury will give you $1000.00 back.

“Yield to Maturity (%): 1.677″
This is the effective interest of this bond. Since it is a zero coupon, it is sold at a discount to par and then matures at par. The difference between those two is your effective income or yield. It is quoted as an annual rate.

“Type: Treasury Zero”
Explained above

OFFERING INFORMATION

“Quantity Available: 1000″
That is how many this broker has in inventory. One thousand bonds, each with a par value of $1000.

“Minimum Trade Qty: 1″
Means you have to buy at least one. You can not buy less than one, like $500 worth.

“Dated Date: 8-Dec-2009″
This is the original issue date.

“Settlement Date: 15-Jun-2010″
This is the date it would settle to your account if purchased.

You should be aware of one of the pitfalls of buying Zeros. Google “Zero Coupon phantom income” and read up on the “accreted income” and its taxation. You may be liable for taxes on income you haven’t received. Just a heads up.

Q: How do i calculate this zero coupon??
Suppose someone bought a zero coupon $100,000 bond that now has 13 years to run. The yield on similar debt today is 6.0%. Also note that this was part of a stripped treasury. or STRIP. The coupon rate on that security bond had been 7.0% What is the value of that zero coupon today?

A: the strip is completely irrelevant, as it has been stripped. the value this prime sum zero coupon bond.
you estimate the ammount of money you would need today, to yield the prime sum at maturity given the current market rates.

an example. your bond is worth 100.000 in 13 years. at the current money market rate: 5% (give or take). you would need:

(1.05)^13 * x = 100.000
1.88 * x = 100.000
x = $53032

Q: probability of bond default?
i have the following information

$1000 face value zero coupon bond maturing in 10 yrs.
treasury ytm= 4%
risk premium = 1%
default premium = 3%

if bond defaults it will pay 0 cents on the dollar.
what is the probability of default?
pls explain how u get the answer.

A: woah!

Q: this is my question?
Which one of the following investments is probably least appropriate for a qualified
pension or profit sharing plan?
a. Municipal bonds b. Treasury bonds c. Zero coupon bonds d. Corporate AAA bonds

A: Muni bonds are inappropriate for any type of qualified retirement account. The interest earned on muni bonds is exempt from federal income tax (and possibly state income tax). As a result, the rate on muni bonds is typically lower on a before tax basis than a similarly rated corporate bond. (The value of muni’s being their after-tax rate; typically higher than corporates)

Since the growth of assets within a qualified plan account are not taxed from year to year, you would loose the tax exempt benefit of munis. Since the other three choices are not tax exempt they would be appropriate options to include in a qualified plan offering.

Q: How do I create a structured product for myself to track the S&P 500 Index?
I have been doing research on structured products that track common indexes such as the S&P 500. One of the main criticisms of such products are the fees that the structured products’ creators charge the investor. This led me to the idea of creating my own structured product rather than buying one that someone else has made. I am familiar with the bond, futures, and options markets so I am comfortable assembling the product myself. Are there any reasons why I would pay the high fees when I could create the same product msyelf?

I would like to know how exactly to create a structured product that offers 100% principal protection and that tracks the S&P 500 Index over let’s say a 5 year period. I know that step one would be to buy 5-year Treasury zero-coupon notes with a total face value equal to the principal I am investing. The next step, I think, is to using the remaining principal to buy a 5-year call with a strike price equal to today’s index value. Am I correct? Thanks
Basically, I want to know how can I create a principal protected investment that gets 100% (or around that) of the S&P 500’s performance. (How do the banks and insurance companies do it? I know the general concept, but can someone provide me with actual bonds and contracts for let’s say a $1 million dollar investment. Btw, this is an academic exercise for me as I don’t plan on executing this strategy for at least a year. Thanks.
It seems that the longest term for a CME S&P 500 call option is 2 years. Are there any other options products that provide a longer term (5 years)?

A: What you are trying to do is a funded structure. A 5-year treasury zero coupon notes is available as a strip and it is not usually the cheapest. However, your nominal principal will be protected, but as you know there are many other risks to the zero-coupon issues. Zero coupon reduces reinvestment risks as you might know that there are many other risks that could affect the value of money.
Buying a 5-year call on the S&P500 with a strike price close to today’s index value will not be cheap either. I looked at the Dec09 S&P500 1400 call and it is priced at $190.00.
My Opinion is that such a strategy works well at the bottom of a correction, but as many headlines today mention that “The stock market had gone more than 45 months without a drop of more than 2 percent in a single session” (Tim Paradis, AP Business Writer).
Therefore, as you described it, this strategy will reap the benefit of the S&P500 when there is an appreciation in the value of the index. If the S&P doesn’t reach the 1590 limit within 2 years, then the total return on the strategy will be less than the return on the risk free rate.
I think that you should look at this structure from an asset and liabilities prospective. In the asset column, you have the zero coupon treasury and the call option. What is your liability? Here is what is missing. Most institutional investors, as you mention try to balance their balance sheet by keeping them at equal duration which means that not only the assets and liabilities should balance but also the timing of the liabilities should match the timing of the assets. So to make it short, there is something that you need to sell and receive a premium for in the liability column that would have the same duration of your asset column.
I would keep this as an academic exercise for now.
Hope this helps
Boudames

Q: Can someone explain and show me if I am correct in my thinking on this problem. I selected 5,412,600. Thanks ?
McGwire Company’s pension fund projects that most of its employees will take advantage of an early retirement program the company plans to offer in five years. Anticipating the need to fund these pensions, the firm bought zero coupon U.S. Treasury Trust Certificates maturing in five years. When these instruments were originally issued, they were 12% coupon, 30-year U.S. Treasury bonds. The stripped Treasuries are currently priced to yield 10%. Their total maturity value is $6,000,000. What is their total cost (price) to McGwire today?

$553,776
$5,142,600
$3,404,561
$4,042,040
$3,725,528

Again I chose 5,412,600 but am not certain if I was thinking along the correct lines. I have already gotten my final grade for the class but would like to be able to process this type of issue if it ever comes up in reality.

Thanks again everyone.

A: I believe the answer should be 3,725,528. How you arrive at this answer is as follows: 1.10**5= 1.61051. That is the growth rate for 5 years at 10% interest. Divide that number into 6,000,000 and get the answer of 3,725,528

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