Zero Coupon Municipal Bonds

While most municipal bonds provide semiannual interest payments, zero coupon bonds, as their name suggests, have no coupon or periodic interest payments. 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. Zero coupon bonds are sold at a substantial discount from the face amount. When a zero coupon bond matures, the investor receives the full face amount of the bond.

Long-term bonds and zero coupon bonds are more exposed to interest rate risk than short-term bonds and coupon bonds.

Zero coupon municipal bonds are attractive to investors seeking tax advantages and long-term capital accumulation for retirement, education funding, or other long-range savings goals. Individuals can time the maturity of their investment to match their future needs. Here are some of the reasons to invest in a zero coupon municipal bond:

  • Retirement planning: Zero coupon municipal bonds can be used to supplement a retirement savings program. They are not, however, suitable for Individual Retirement Accounts (IRAs) or qualified pension plans, because these plans already have tax-advantaged status.
  • Education funding: A municipal zero portfolio can be structured to mature during a child’s or grandchild’s college years.
  • Gifting: In 2013, the annual estate and gift-tax exclusion is $14,000. A husband and wife can each gift $14,000 for a total of $28,000, and this can continue to grow with the tax benefits of zero coupon municipal bonds.
  • "Kiddie tax": A series of changes to the tax rules, starting in 1986, means that minors' accounts generating more than $2,000 in annual income for children under the age of 19 are taxed at the parents’ or guardians’ rates. Contact a tax professional for more information.
  • Supporting an elderly parent: In today’s aging society, more people are spending large amounts of money providing care for their aged parents. Zero coupon municipal bonds purchased now can help meet those future needs. 


Zero Coupon Bonds from David Lerner Associates

We maintain our own in-house Trading Department staffed by municipal bond specialists. Our in-house Trading Department maintains a large and varied inventory. As a result, the zero coupon bond investor is able to buy and sell directly.

Every one of David Lerner Associates investment counselors is extensively trained in municipal bonds. We stand ready to help you choose the municipal bonds that are best suited for your investment portfolio.Our investment counselors will help guide you through the array of investment choices, designing a personal investment strategy that meets your individual needs and goals.