Do not confuse US Savings Bonds with Zero Coupon Bonds as they are different animals and Zero Coupon Bonds have a unique set of rules unto themselves. Zero Coupon Bonds are investment opportunities, sold at deep discounts from their face value. When the Zero Coupon Bonds mature, the investor does not score an interest rate or yield, but the bond can be cashed in for the full face value. For example if a consumer buys a Zero Coupon Bond for $25 that has a face value of $100, when the bond matures that will be the return on the investment.
Zero Coupon Bonds tend to mature after long periods of time such as ten, fifteen or more years. They are best used as an investment strategy for long-term goals such as paying for a childs education or for a down payment for a home.
Not all Zero Coupon Bonds are issued by the US Treasury. Many corporations as well as state and local government entities offer these types of bonds on the secondary markets. Very few Zero Coupon Bonds have a tax-exempt status, therefore investors may still have to pay federal, state, and local income tax on the imaginary interest these bonds earn. Additionally, because these types of bonds do not pay interest until full maturity, their values and prices fluctuate more than many other bonds in the secondary market.
For further clarification, Zero Coupon Bonds are traded on the secondary market. The secondary market is for the trading of securities that have already been issued in an initial private or public offering. Since securities such as Zero Coupon Bonds are traded from one investor or speculator to another it is important that the secondary market is highly liquid.
