|
The Financial Planning Center Comprehensive Financial Planning
|
||
|
Present Value on Zeros |
The following information on Zero-Coupon Treasury Bonds was designed to give investors a basic understanding on the subject listed below.
The information provided on Zero-Coupon Treasury Bonds should not be construed as investment advice, tax advice or a recommendation to purchase any security. Always consult a licensed professional and your personal tax advisor to determine if Zero-Coupon Treasury Bonds are right for you.
|
What is a Zero-Coupon Treasury Bond? Back by the full faith and credit of the U.S. Government Be Aware of the Taxation Before You Invest Present Value on Zeros Questions to Ask Before You Open an Investment Account |
The Present Value Chart indicates the approximate present (accreted) value of a zero at its respective years to maturity and at various interest rate levels. To compute the present value of a zero after interest rates have changed, follow the example. Example: Let's assume a 10-year zero was purchased with a yield to maturity (YTM) of 7%. Based on the Present Value Chart, we can see the zero would have a present value of $503. This can be found by intersecting the Interest Rate column (7%) by the Years to Maturity row (10-year). To see the inverse relationship interest rates have on the value of zeros, look at the value of the zero if interest rates fluctuate by 1% (100 basis points). If interest rates rise 1% to 8% in one year, this zero would be worth approximately $494 (a decrease in value of 1.789% or $9). However, if interest rates fall by 1% to 6%, the zero would be worth $587 (an increase in value of 16.7% or $84). This is why zero coupon treasury bonds are so attractive. If you were to purchase the bond above, you are guaranteed a 7% return if you hold the bond for 10 years. If interest rates were to fall by 1% in one year, your invest would increase by 16.7% ( The return in this example does not reflect the impact of transaction costs when buying and selling which would reflect a lower net return). If the above zero matured in 20 years instead of 10 years, the present value would be $253. If interest rates rise 1% to 8% in one year, this zero would be worth approximately $225 (a decrease in value of 11.0672% or $28). However, if interest rates fall by 1% to 6%, the zero would be worth $325 (an increase in value of 28.458% or $72). Note: The longer the maturity of zeros (STRIPS), the greater is the potential market price fluctuation. |
|
|
If You Desire More Time to Pursue Life's Pleasures, Find Out How a Certified Financial Planner Can Help.
Click Here for more information on financial planning and The Financial Planning Center
Contact: ProActive Financial Planning
| HOME | SITE MAP | MUTUAL FUND CENTER | IRA CENTER | EDUCATION CENTER | BOND CENTER || FINANCIAL PLANNING CENTER |
|
||
DISCLAIMER
The www.open-ira.com and ProActiveFinancialPlanning.com websites is for information, education, and entertainment purposes only. This is not a solicitation or offer to purchase or sell any security. This information is not intended to be used as the primary basis for investment decisions, nor should it be construed as advice designed to meet the particular needs of an individual investor. You alone will need to evaluate the merits and risks associated with the educational material provided. Decisions you make based on information contained in this web site are your sole responsibility. Mutual funds involve risks and investment returns and principal value will fluctuate so that when shares are redeemed, they may be worth more or less than original cost. Performance of classes will differ. Before investing in any mutual fund, be sure to request a mutual fund prospectus from the mutual fund company. The prospectus contains important information, including information on fees and expenses. Read it carefully before investing. Past performance is not a guarantee of future results. None of the information provided on this web site should be construed as tax advice. You are advised to consult your own tax professional regarding the tax consequences of your financial planning strategy, IRA strategy, investment activities, and all other tax related issues. Use of hyperlinks to other internet resources is entirely at your own risk. The fact that such links may exist does not indicate approval or endorsement of any material contained on any linked site. The information and opinions obtained from other sources and services are considered to be reliable but we do not guarantee its accuracy. Information from other linked sites is independent of ProActive Financial Planning or any other party affiliated with this website. In no event shall ProActive Financial Planning or any other party affiliated with this website be liable for any damages, including without limitation direct or indirect, special, incidental, or consequential damages, losses or expenses arising in connection with this site or the use thereof or inability to use by any party, or in connection with any failure of performance, error omission interruption, defect, delay in operation or transmission, computer virus online or system failure, even if ProActive Financial Planning or representatives thereof are advised of the possibility of such damages, losses or expenses.
Trademarks, Copyrights, and Other Proprietary Rights
All content, information, and images available through the www.open-ira.com and www.proactivefinancialplanning websites are the property of ProActive Financial Planning and are protected by copyrights, trademarks, service marks, patents and other proprietary rights and laws. You may not copy, republish, redistribute, transmit, alter, edit, or exploit in any manner for any purpose content and information in, or derived from, this web site, without the expressed written permission from ProActive Financial Planning.