In the following year 12 months of interest income would be reported. If the bond is not held to maturity, the date that the bond is sold is an anniversary day, and interest income for the year of sale would be reported up to that date. They are not tax efficient, and the bookkeeping is complicated! No bookkeeping is required when they are inside a registered account. Revised: September 19, All Rights Reserved.
Zero-coupon bond - Wikipedia
Strip Bonds. ACB of strip bond at start of year.
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Annual income. All Yields, Prices and Inventories are subject to change. Yield calculations may vary based on the par value purchased. This list is a small sample of our extensive inventory.
What is a stripped bond?
Please view our online offerings today, or speak to an Investment Representative at Open an account online or try out our actual investing site — not a demo — with a practice account. Most investors who have strip bonds favor those with the best credit rating; such as government bonds, to ensure that they in fact will receive their full face value at maturity. By making a relatively small investment today, you will end up with a larger, known sum years down the road at maturity, earning what could be an attractive interest rate.
Strip bonds eliminate reinvestment risk during your holding period. Since your bond doesn't pay interest every six months, you don't have to keep worrying that interest rates will be down when you receive -- and may want to reinvest -- those interest payments. They may be hard to sell before maturity because there isn't an active secondary market for them. This means that if you have to sell before maturity, you may receive a low price since there may not be many of buyers; Because they don't pay interest, a rise in interest rates will cause them to fall further and faster than regular bonds.
How do strip bonds work? What's the best way to use them?
This could be a problem if you want to sell before maturity. Of course, their prices will also jump to greater heights, and more quickly if interest rates fall. Even though you don't actually get any income from your strip bond each year, Revenue Canada considers that you do. This means you have to pay tax on that deemed income each year -- even though you haven't actually received any income. Because these earnings are treated as interest, not capital gains, you pay tax at your full regular rate.
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The difference between what you paid for the strip and what you receive at maturity is considered to be interest. You have to declare a proper proportion of that each year on your taxes.
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The tax angle makes strip bonds a poor choice outside of a tax shelter.