Bonds, also called fixed-income securities, provide investors with successive in
ID: 2712755 • Letter: B
Question
Bonds, also called fixed-income securities, provide investors with successive income over a specific time frame at regular intervals. These securities are issued by a number of companies, municipalities, and government agencies.
There are unique tax liabilities for investor income derived from bonds and other fixed-income instruments, which affect overall holding period returns realized from these investments. In addition, there are varying levels of risk associated with holding these types of securities.
Select two types of bonds and compare the following between the two types selected:
What are the comparative levels of investment returns for each? View: http://research.stlouisfed.org/publications/usfd/
What are the relevant tax considerations applicable to the investment returns on each?
What are the comparative risk considerations between the two?
Explanation / Answer
Hi,
The correct answers are as follows:
The two types of bonds are Series EE savings bonds and zero coupon bonds
Series EE savings bonds are low-risk savings products that pay interest for up to 30 yearsWhereas, A debt security that doesn't pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value.
The tax liability on both the bonds remains the same. In case of zero coupon bonds, despite the fact that they have no stated coupon rate, zero-coupon investors must report a prorated portion of interest each year as income, even though it has not been paid out. Series E and EE savings bonds are also state and local tax free, except that the interest on them may be deferred until maturity. Series H and HH bonds pay taxable interest semiannually until maturity.