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Ben's Investment Co. By providing this investment service, Ben's would receive a commission on the sale of these two stripped bonds. There are additional factors to consider. The price that Ben's Investment Co. It may also sell off the coupon payments to other investors. In the example, Ben's breaks even and receives no return on its investment.

Strip bonds example

Companies that do this make money based on selling at a premium to do the stripping service along with any gain it makes from the difference between the selling price on either the face value or coupon payments compared to what they initially paid for the bond. For further reading, see Advantages of Bonds.


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Strip bond example

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However, in contrast, an investor who owns a regular bond receives income from periodic coupon payments, which are usually made semi-annually. Some zero-coupon bonds do not start out as zero-coupon bonds. Because zero-coupon bonds do not pay interest and their par value is due at maturity, their price is more sensitive to interest rates. Therefore, not only is a falling interest rate environment good for bonds, it is even better for zero-coupon bond funds. With regard to bond mutual funds, keep in mind that the investor owns shares of the mutual fund and not the holdings of the mutual fund portfolio.

Tax on US Treasury STRIPS | Finance - Zacks

Therefore the bond mutual fund's price or what is referred to as its net asset value or NAV is a central function of the bond fund's total return to the investor. This is why bond mutual funds have principal risk -- because the amount invested can fall in value, whereas an individual bond holder can simply hold their bond without incurring any loss, as long as they don't sell their bond at a lower price than purchase.

Bond prices and interest rates are like two opposing ends of a teeter-totter: When one side rises, the other side falls. Therefore when interest rates are rising, bond prices are falling and when interest rates are falling, bond prices are rising.

FRM: Dollar duration of zero coupon bond

So the best time to invest in bonds is when interest rates are falling because the price or value of your bond investment is rising. The only question that remains with regard to the best timing for investing in zero-coupon bond funds is: When are interest rates likely to fall?

What is a stripped bond?

The answer is during deflationary times. The reason is that the Federal Reserve will fight deflation, which is a period of falling prices for consumer goods and services, by reducing interest rates through the purchase of Treasury Bonds. Investors should use caution when buying and holding zero-coupon bond funds because their prices have dramatic swings up and down. Also, long-term bonds will have greater fluctuation in price than short-term bonds. For example, in the year , ZROZ had a