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Path: utzoo!watmath!clyde!burl!ulysses!bellcore!decvax!linus!philabs!pwa-b!mmintl!franka
From: franka@mmintl.UUCP (Frank Adams)
Newsgroups: net.invest,net.taxes
Subject: Re: zero-coupon bonds
Message-ID: <1196@mmintl.UUCP>
Date: Mon, 10-Mar-86 19:16:34 EST
Article-I.D.: mmintl.1196
Posted: Mon Mar 10 19:16:34 1986
Date-Received: Sat, 15-Mar-86 19:44:40 EST
References: <150@daisy.UUCP>
Reply-To: franka@mmintl.UUCP (Frank Adams)
Distribution: net
Organization: Multimate International, E. Hartford, CT
Lines: 47
Xref: watmath net.invest:1206 net.taxes:1099

In article <150@daisy.UUCP> misha@daisy.UUCP (Mike Umansky) writes:
>I need help with understanding zero-coupon bonds.
>I would like to know how much of federal zero-coupon bonds
>do I have to buy now to get $100,000.00 at its 10 year maturity.
>I would also like the same info for 5 year maturity.

Since bonds, including zero coupons, are also quoted in terms of par value,
the answer in either case is that you need to buy $100,000 of bonds.
Of course, you need to know the current price of the bond in order to
know what this will cost you.

>Also, is there a formula that I can use to calculate the
>return of these bonds based on initial purchase value and maturity time??

If y is the yield expressed as a fraction (e.g., 8% is .08), P is the par
value, C is the current value, and n is the number of years to maturity, then

            P
   C = -----------
               n
          (1+y)

(This is actually an approximation, but it is close enough for most
purposes.)  Solving for the yield, we get:

            (1/n)
   y = (P/C)      - 1

This is not easily computed on a four-function calculator, but should be
no problem if you have access to a computer (a reasonable assumption).

>Also, what about tax implications at the time of purchase and the time
>of getting cash back after maturity.  What am I liable for in both
>instances???  Any help is greately appreciated!!!

I believe, under current law, you are liable for taxes every year that
you own the bonds, even though you are recieving no payments.  At one
point, the taxable income was computed by linear interpolation from the
price you paid (in other words, if you paid $5,000 for a bond with a
$10,000 par value maturing in ten years, you were taxed on $500 per year).
Today I think a formula closer to current value formula above is used.
(However, the critical date is the date the bond was issued, not when
you bought it.)  I would recommend talking to an accountant before you
purchase a zero-coupon bond in a taxable environment.

Frank Adams                           ihnp4!philabs!pwa-b!mmintl!franka
Multimate International    52 Oakland Ave North    E. Hartford, CT 06108