Not sure why/how zero-coupon bonds face negative cash flow towards maturity? Any thoughts please?
when you issue a zero-coupon bond, there is an initial cash flow. then there are no cash flows until the maturity, at that point there will be a negative cash flow equal to the face value.
I am confused! I thought this is what the senario of cash flow: When we buy a zero-coupon bond it’s a negative cash flow and when the bond is paid at maturity it s positive cash flow. (if we just look at those two transaction alone) Negative cash flow happens when cash outflow exceeds cash inflow.
The question is from the perspective pf the issuer (I guess)
Thanks Joey … great ingenuity indeed. Its my bad. I didn’t read carefully. The reading says “STRIPS are taxed by the IRS on their implicit rate, which, for fully taxable investors, results in negative cash flow in years prior to maturity” cash outflow due to taxation creates negative cash flow. Thanks again everybody.
yeah, OID bonds suck in taxable accounts.
Positive cash flow is when the company’s cash increases and negative is when it decreases. When zero coupon is paid out the company’s cash decreases hence negative cash flow. Any thoughts
Are zero tax calculations based on an annual or semi-annual implied interest payments? I assume semi-annual, however, I cannot find it stated explicitly. Also, if the tax is based on semi-annual payments, the investor would pay slightly more interest due to the compunding of interest payments, right? If the above is true, why would anyone with a taxable account buy zeros — simply to avoid reinvestment risk?