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Types of Bonds

Variations of Zero Coupon Municipal Bonds

Two common variations of zero coupon municipal bonds are "convertible zero coupon municipal bonds" and "stripped municipals."

Convertible Zero Coupon Municipal Bonds

These bonds are sold as zero coupon municipal bonds and then, generally after eight to 15 years, convert to interest-paying bonds. They can be used by individuals planning for retirement. During their working years, individuals can accumulate tax free capital that is ready for them when they retire. Then, upon retirement, they can receive the tax free income stream they need for living expenses.

Stripped Municipals

Municipal bonds which pay interest semiannually can be separated (or stripped) into their principal and interest components. The cash flow of the coupons is repackaged into stripped municipals with a greater variety of maturities from six months to 40 years. Like zeros, stripped municipals are issued at a deep discount from face value and are available in a wide range of credit qualites.

 

All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, the Securities Industry and Financial Markets Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.