A PRESCRIPTION FOR GROWTH
I was recently the guest speaker at an investment seminar. After
my presentation, I opened the floor to questions.
A local physician, the spokesman for the group, jumped to his feet
and exclaimed, "We all have the same question. How do we return
to the days of growth in our portfolios without taking on additional
risk?"
They were pleased with the advice I offered and it was a much simpler
approach than they had expected. I suggested they call a tax-free
bond specialist and ask about high-quality, zero coupon tax-free
bonds.
Buying At A Discount
Zero coupon municipal bonds pay no current interest. They are purchased
at a substantial discount from par value and accrete (grow) to their
full face value at maturity. The best part is they are completely
exempt from federal income tax as well as capital gains tax.
Zero coupon bonds will usually have higher yields than comparable
coupon bonds. This is an additional edge for investors who can afford
to defer current income payments. A top quality (AAA), insured,
18-year, full coupon bond should yield approximately 4.75% in today’s
market, whereas a zero coupon bond of like quality and maturity
will yield approximately 5.25%.
Guaranteed Growth
Zero coupon bonds are unique because they provide guaranteed growth
in your portfolio. Notice I use the word "guaranteed." With other
growth investments, we can only talk about expectations.
Today, you can invest $39,300 in that previously mentioned 18-year,
AAA insured zero coupon bond knowing that it will grow to $100,000
its full face value - at maturity.
Along with adding balance to an equity-heavy portfolio, zeros are
an excellent vehicle for funding a future event such as a grandchild’s
college education or any balloon payment.
One important caveat: Some zero coupon bonds are callable and some
of the call features can be confusing. I advise you to consult a
bond specialist who is familiar with how accretion schedules work.
If you would like to view some of our zero coupon bond offerings,
click here. 10/15/01
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