What Are Zero-Coupon Bonds and “Strips”?
Zero-coupon bonds, or zeros, are sold at a discount to face value. Interest is compounded during the term of the bond, but unlike other bonds, those interest payments aren’t made until the bond matures. With zero-coupon bonds, an investor buys a $1,000 bond for considerably less than that amount. There are no payments received until the bond matures – perhaps as far into the future as 30 years. However, investors can buy and sell the bonds prior to maturity — realizing a gain or loss depending on how prices have changed since the original purchase. The most popular forms of zero-coupon bonds are sold by the U.S. government. U.S. Savings Bonds such as the EE Series are zero-coupon investments. Treasury bills, which mature in one year or less, are also zero-coupon investments. Another form of zero-coupon investment is called a “strip.” Strips, or
