If you've ever wondered what the "long bond" and "zero coupon bonds" are, wonder no more.
Bonds come with a variety of maturity periods. The long bond is the U.S. government's 30-year bond. Its yield is 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 the 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.
Of course, over long periods, bonds don't tend to do as well as stocks. As Jeremy Siegel has pointed out in his book Stocks for the Long Run, between 1802 and 2001, stocks outperformed bonds 61% of the time over 1-year periods, 70.9% of the time over 5-year periods, 80.1% of the time over 10-year periods, 91.7% of the time over 20-year periods and 99.4% of the time over 30-year periods. Of course, past performance is not an indicator of future results -- but these are pretty powerful numbers, regardless. Stock funds are, over the long haul, likely to do better than bond funds.
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