Types of Bonds
Types of Zero Coupon Bonds
The three largest categories of zero coupon securities available are zero coupon Treasury bonds, zero coupon corporate bonds and zero coupon municipal bonds, which are issued by the U.S. Treasury, corporations, and state and local government jurisdictions, respectively. Generally, zero coupon Treasury bonds are considered the safest zero coupon bonds because they are backed by the full faith and credit of the U.S. government. Zero coupon corporate bonds and municipal bonds offer a potentially higher rate of return commensurate with additional credit risk, which will vary based on the issuing entity. Zero coupon municipal bonds are the only zero coupon securities that pay interest that is exempt from federal income tax and, in many cases, state and local taxes. This section will discuss zero coupon municipal bonds.
Size of the Municipal Zero Coupon Market
Zero coupon bonds were introduced to the fixed-income market in 1982. The municipal zero coupon market is substantially larger today than it was in 1982, when there were 58 new offerings totaling $2.2 billion in issuance.
In 2009, there were 380 new issues totaling $17.2 billion. More than 164.4 billion of zero coupon municipal bonds have been issued in the past ten years.*
To understand how zero coupon municipal bonds work, it is important first to become acquainted with the principal characteristics of both municipal bonds and the zero coupon structure.
* Source: Thomson Reuters
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.