Home' Trinidad and Tobago Guardian : June 1st 2014 Contents JUNE 1 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCE | SBG19
which is the risk that the issuer will default and
will not return the original investment or interest
owed. Treasury and agency zero coupon bonds are
of very high credit quality. Although zero coupon
municipal bonds are generally considered to be high-
quality investments, not every issuer has the same
tax base or source of revenue.
Purchasing investment-grade bonds will mitigate
this risk but will not eliminate it. It is important to
know an issuer s creditworthiness before you pur-
Zero coupon bonds
and long-term wealth
Whether zero coupon bonds are suitable for you
may depend on your need for predictability, your tax
situation and your future spending needs.
Retirement: Zero coupon bonds can supplement a
pension, proceeds from the sale of a business and
other assets. In this hypothetical example, the portfolio
is worth $250,000 at retirement and the withdrawal
rate is 4.0 per cent per year, or $10,000. Based on
the interest rates that prevailed at the end of 2012,
an investor could buy a series of 20 zero-coupon
Treasury bonds, one of which would become
redeemable in each of the next 20 years.
The total discounted cost of those 20 bonds would
be approximately $165,000. The balance of the original
$250,000 could be allocated to equities for growth
potential, creating a portfolio that holds almost 30
per cent equities to compensate for inflation or to
provide extra latitude for spending. Planning horizons
of more than 20 years can be addressed at the outset,
although at greater cost.
Higher Education: Zero coupon bonds may be ben-
eficial if your family is planning for higher education
and you need a predictable amount available at a
designated future time. For example, a hypothetical
family with an eight-year-old and a three-year-old
could amass a portfolio of zero coupon bonds with
the goal of receiving $100,000 per child to fund four
years of higher education when each child is age 18,
as the chart below indicates.
Zero coupon bonds for a college fund
The hypothetical example above assumes an interest
rate of 3.00 per cent for the 10-year zero coupon
bond (for the eight-year-old) and an interest rate of
3.25 per cent for the 15-year zero coupon bond (for
Taxation: When reviewing zero coupon bonds,
consider how accreted interest would impact your
tax situation, especially if you are in a higher tax
bracket. If tax issues are a concern, you could consider
weighting holdings more heavily toward municipal
zero coupon bonds or maintaining your allocation
in a qualified retirement account.
Are zero coupon bonds for you?
The benefits of predictability, value and minimal
reinvestment risk make zero coupon bonds potentially
stand out from other types of fixed coupon bonds.
Agencies issues are issued by official government
GSEs are independent organisations that are in
part sponsored by the federal government. Interest
on municipal bonds is generally exempt from federal
Courtesy of: David Fox, CFP, senior vice president,
Branch Name: Morgan Stanley Boca
Article by Wealth Management Systems, Inc.
and provided courtesy of Morgan Stanley Financial
The author(s) are not employees of Morgan Stanley Smith
Barney LLC ("Morgan Stanley"). The opinions expressed by
the authors are solely their own and do not necessarily
reflect those of Morgan Stanley. The information and data
in the article or publication has been obtained from sources
outside of Morgan Stanley and Morgan Stanley makes no
representations or guarantees as to the accuracy or com-
pleteness of information or data from sources outside of
Morgan Stanley. Neither the information provided nor any
opinion expressed constitutes a solicitation by Morgan Stanley
with respect to the purchase or sale of any security, invest-
ment, strategy or product that may be mentioned.
The Trinidad Guardian engaged Morgan Stanley Financial
Advisor(s) to feature this article.
© 2013 Morgan Stanley Smith Barney LLC Member SIPC.
Investment Needed to Create $10,000 per year*
Immediate total investment needed:
20 years $165,000
30 years $215,000
*Indicated costs assume the initial amounts are invested in zero coupon US
Treasury bonds maturing on the anniversary dates of the investment and yielding
the market rate for that maturity that prevailed on December 31, 2012. Estimated
investment needs for similar ladders created on other dates will vary, increasing
as prevailing market yields fall and decreasing as prevailing yields rise. This hypo-
thetical example does not account for potential custody expenses, transaction
costs or tax liabilities, if any. The value of Treasury bonds can be assured only
when they are held to maturity and redeemed by the US government. Until
redemption time, the market value of Treasury securities varies as prevailing
interest rates rise and fall. Past performance is not a guarantee of future results.
THE RIGHT BALANCE
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