Are zero-coupon bonds a good way to finance my child s college education?
Zero-coupon bonds can be a good investment if you know that you will need a lump sum on a specified date in the future, such as when your child is ready to enter college. “Zeros” are sold at a deep discount to their face value generate no ongoing interest payments, and have no reinvestment risk. Instead, you get to redeem the bond for its full face value when it matures. The difference between the discounted price you paid and the bond s face value when it matures represents your return. Because of the way they work, zeros can be an excellent way to finance a child s future educational expenses. For example, assume you purchase a zero with a $10,000 par value for your child s college education in 10 years. If the zero has an implied yield of 6%, you would pay $5,537 today and receive $10,000 when he or she enters college. The higher the implied yield, the greater the discount and lower initial price you must pay. You can buy even more zeros if you expect college to cost more, or buy di
