You probably know that a bond is essentially a loan. But if you've been wondering what some particular bonds are, such as long bonds and zero-coupon bonds, read on.
Bonds come with a variety of maturity periods. The long bond is the U.S. government's 30-year bond. Its yield is the one often cited by the media when interest rates are being discussed. Treasury notes are shorter-term, maturing in two, five, or 10 years. Treasury bills (or T-bills) mature in 13, 26, or 52 weeks. The minimum purchase amount for most of these instruments is $1,000.
Most people are familiar with zero coupon bonds in the form of U.S. Savings Bonds. You buy them at a discount to face value, hold them for a specified time period, and then cash them in at face value. In a nutshell, that's how zero coupon bonds (or "zeroes") work.
Imagine a regular 5% $10,000 bond, where you lend $10,000 to a company or government. You receive interest payments of 5% per year until the bond matures, when you get your $10,000 back. (You used to have to send in coupons to get these payments.)
With a zero coupon bond, you don't receive any interest payments, but the amount you lend is smaller than the amount you'll receive at maturity. Thus, a zero coupon bond could pay you the equivalent of 5% per year by having you pay $6,139 today to receive $10,000 in 10 years.
Learn more at BondsOnline.com and SavingsBonds.gov and at investinginbonds.com.
