Key Points:

• Zero-coupon bonds accrue value over time, offering a low-risk investment for long-term goals.
• Great for conservative investors, they can help save for college or other future expenses.
• Available through brokerage firms, they’re a safe option backed by the U.S. government.
• Also: Forget bonds. Even with higher rates, they don’t hold a candle to the wealth created by dividend legends to buy and hold forever. 

Lee and Doug discuss the often-overlooked zero coupon bonds, which, like savings bonds, accrue to full value over time without paying periodic interest. They explain how zero coupon bonds are particularly attractive to conservative investors or those looking to save for future expenses, such as a child’s college education. These bonds are purchased at a deep discount to their face value and mature at full value, making them a stable, long-term investment. The price of these bonds is set daily based on their maturity and the prevailing interest rates. They suggest that zero coupon bonds are a thoughtful gift for grandparents looking to contribute to their grandchildren’s future education or for parents concerned about the stock market’s volatility over the long term. They also note that these bonds can be purchased through brokerage firms or online platforms.

Transcript:

0% coupon bonds is something I used to hear about, God, all the time.

Maybe when they first came out with them or something.

They pretty much disappeared off the radar.

So is that something at this point anybody should look at?

I personally think they are simply because, and for people that don’t understand, a zero coupon bond is like a savings bond.

If you ever got a savings bond from your grandparents…

Let’s say it’s denominated in $1,000 increments like all treasury debt is.

But what it doesn’t do, the name says it all.

It doesn’t pay an interest payment to the bondholder.

What it does do is it accrues to the full value.

So in other words, let’s say it’s a 20-year zero coupon bond.

Well, instead of buying it at $1,000 per bond, you may pay $200 for that bond.

And as time passes and regardless of what the…

You know, there is an attached type rate on it.

It just doesn’t pay it.

It’ll accrue up in value to that thousand dollar level.

And for many people, especially for people that are ultra conservative and worried about having retirement money, it’s…

If you buy 20 or 30 years out, you could be buying bonds for $100 or $150.

So you could go in and buy 10…

You know, every quarter and that you could have them mature on increments that fall year after year.

Right.

Explain to people how the price is set.

So I walk in and I say, OK, I want a zero coupon bond.

You know, how is the price set that day?

Well, the prices can vary because the convexity of a bond makes them move really fast with interest rates.

You know, if they go up or down and they can move really fast.

But typically it’ll be set on a daily basis based upon, A, the maturity of the bond and what the stated accrual rate is.

So, again, if it’s a zero coupon, let’s say you bought one today for 20 years, it would mature in 2044.

It would mature to full value.

And so if you paid $200, and again, I’m not sure that’s the price of a 20-year zero today, but if you bought it at $200 when it came due 20 years from now, it would be worth $1,000 for every bond.

I know that you might buy this for yourself.

Is this the kind of thing you give to some?

And savings bonds when I was young, as you said.

You were born, your grandparents got you savings bonds.

They got put in a lockbox someplace when you turned 18.

Is there a target group of people you would give this to as a gift?

Well, yeah.

I mean, for grandparents, let’s say you want to help your son and daughter put your grandchild through college.

You could go in, let’s say, well, for instance, my grandchild will be born in November.

Okay, so that’s 2024.

They will probably start school in, let’s see, 18 years from now would be 2042.

So you could go in and buy, let’s say you wanted to help with college costs in 2042.

You could buy 2042 bonds, 2043, 2044, 2045, if they have a registered year 2046, and you can have the bonds mature then for your son or daughter to help put a child through school.

So it’s not a bad gift for a grandparent.

And it’s not a bad idea for young parents worried about the stock market or worried about how the stock market will be in 18, 19, 20 years from now.

Because they are backed by the full faith and credit of the U.S. government.

And as we know, if they run out of money, they’ll just print more.

Yeah.

For those of us who are watching right now, where do I buy one of these?

Well, typically, you can go online at your brokerage firm and see if they carry them, you know, in their do-it-yourself fashion.

If not, if you have a stockbroker at any good firm, they can go in and they can help you find bonds that’ll suit your need, but they’re constantly out there.

And see, the government likes them because they don’t have to pay any interest on them.

They ultimately have to pay the full layer of the accrual.

But they don’t have to pay any interest on them.

So I think it’s, again, not like we were talking about at one point in the past, unlike popular investments that people look for for big gains to help fuel your college costs for your kids.

What if the stock market crashes right when your kids are going to school?

Unless you took it out, you could have 20, 30, 40% of that money go away.

And even if it’s in a 529, you know, which is a qualified plan that’ll help keep that money protected from taxes, it could still suffer stock market losses.

So for those that are a little more conservative, it’s not a bad idea.

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