Alternate Types of Bonds

Two other types of bonds might be of interest to online investors: zero-coupon bonds and Eurobonds. I describe these alternative bond types in the following sections.

Zero-coupon bonds

Zero-coupon bonds offer no interest payments but are put on the market at prices substantially below their face values. The return to the investor is the difference between the investor’s cost and the face value received at the end of the life of the bond.

If you don’t rely on interest payment income, zero-coupon bonds may be the way to go for your nontaxable retirement plan (such as an individual retirement account, Keogh plan, or other nontaxable pension fund). The Internal Revenue Service taxes zero-coupon bonds as if investors received regular interest payments. This tax is based on amortizing the built-in gain over the life of the bond. In other words, for taxable accounts, investors have to pay taxes on income they haven’t received, but for nontaxable accounts, they’re a great investment choice.

Some brokerages offer Treasury strips. Large companies purchase 30-year Treasury securities and clip the interest-bearing coupons. The brokers then sell these Treasury coupons like zero-coupon bonds. You purchase the Treasury strip at a discount (say $4,300) and redeem the coupon at face value ($5,000). Treasury strips are like zero-coupon bonds because no interest is paid during the maturity term.

If you’re looking for more information about zero-coupon bonds, the Internet provides many educational articles — for example:

The Federal Reserve Bank of New York (www.newyorkfed.org/about thefed/fedpoint/fed42.html) has an overview of zero-coupon bonds and strips, as well as a short history of Treasury zero-coupon bonds.

The Bond Market Association (www.investinginbonds.com/info/ zeroes.htm) provides useful examples of how zero-coupon bonds can increase returns and eliminate reinvestment risk.

Kiplinger.com (www.kiplinger.com/basics/investing/bonds/ zeros.html) offers an overview of zero-coupon bonds. Kiplinger.com points out innovative ways to purchase zero-coupon bonds and shows how to lessen your tax burden when you cash out.

Eurobonds

Investments in foreign securities typically involve many government restrictions. Eurobonds are bonds offered outside the country of the borrower and usually outside the country in whose currency the securities are denominated. For example, a Eurobond may be issued by an American corporation, denominated in German deutsche marks, and sold in Japan and Switzerland. For additional information about Eurobonds, try BradyNet Pro (www.brady net.com). BradyNet Pro offers “Live” Brady bond prices and spreads updated throughout the trading day. This feature assists you in “breaking the chains to the trading desk.” You can leave the office while still being able to keep an eye on the market at home, in hotels, at airports, and so on. The BradyNet CyberExchange allows you to find the best prices and yields from many data contributors. The CyberExchange also includes descriptions, charts, data downloads, and links for a comprehensive number of Eurobonds, Brady bonds, and other emerging market’s debt issues. You can communicate with fellow bondholders, issuers, and underwriters through asset-specific discussion forums.

BradyNet Pro subscriptions include the Toolbox (custom charting software to analyze and chart bond statistics) and BradyNet Rolodex (an online directory of emerging market participants). Portfolio services automatically update and analyze an emerging market’s debt portfolio’s vital statistics (such as yield, duration, profit, and loss), and a new issues analyzer details issues that fall within your search parameters. Basic service is $99.95 per month. Premium service is $199.95 per month. There is a 14-day free trial.