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Zero-Coupon Municipal Bonds

Find Out if a Discount Bond is Right for Your Portfolio

Zero-coupon bonds were introduced to the fixed-income market in 1982 as a very unique concept in the marketplace. While most municipal bonds provide semiannual interest payments, zero-coupon bonds have no “coupon”, or periodic interest payments. Having a complete understanding of zero-coupon municipal bonds means becoming acquainted with the principal characteristics of both municipal bonds and the zero-coupon structure.

Instead, the investor receives one payment at maturity that is equal to the principal invested plus the interest earned, compounded semiannually, at a stated yield.

Discount bonds are sold at a substantial discount from the face amount. When a zero-coupon bond matures, the investor receives the full face value of the bond.

Types of Zero-Coupon Municipal Bonds

There are three main categories of discount securities available:

  • Zero-coupon Treasury bonds – Generally considered the safest zero-coupon bonds, backed by the full faith and credit of the U.S. government. (Taxable)

  • Zero-coupon corporate bonds – The rate of return is commensurate with credit risk, which will vary based on the issuing entity. (Taxable)

  • Zero-coupon municipal bonds – Accrue interest that compounds free from federal income tax and, in many cases, free of state and local tax as well.

To determine whether or not zero-coupon municipal bonds are right for you, you should review your investment objectives. 

Put a municipal bond specialist to work for you. Work with one of our bond specialists to define your investment objectives and determine whether a zero-coupon municipal bond is the right type of bond for you and your financial portfolio. Contact us today or call 877-467-0070.