Zero-coupon tax-free bonds are investment tools that force the investor to accumulate wealth
Melville, NY -- (ReleaseWire) -- 02/12/2015 --When it comes to investing, all that is certain is that nothing is certain. Today, more than ever, individuals and families desperately seek to find a minimum of certainty for their investments, but it appears to be a task nearly impossible to achieve.
Keith Lanton, President of Lantern Wealth Advisors, disagrees. According to Lanton, "Investing in Zero Coupon Tax-Free Bonds is one of the very few strategies that can help investors bring back some certainty to their portfolios! An investment in zero coupon tax-free bonds empowers investors to achieve two key strategic goals: First, it offers them control over the long-term destiny of a portion of their portfolios. Second, it enables them to have a clearer picture of their financial future by knowing with certainty the outcome and cash-flow of their specific investment!"
Lanton believes that investors have justifiable reasons to complain about the increasingly growing uncertainty they face. As an example, last year, individuals who tried to build their investments on the basis of forecasts by leading economists, ended up with poor returns. "In 2014, seventy two out of seventy two of the nation's top economists polled predicted that interest rates would rise that year. Yet, the 10-year treasury yield fell from 3.00% to 2.20%," noted Lanton. "Furthermore, not-a-single leading economists – none – predicted that the price of oil would tumble from $110 to under $60 per barrel. Yet it did!"
In their ongoing quest for preservation of capital and generating income and growth, investors constantly wrestle with uncertainty. The ability to invest their money confident of knowing upfront what the exact value of a certain investment will be in three, five, ten or twenty years from now, appears to remain a wishful thinking.
Lanton explains that Zero-coupon tax-free bonds can help investors deal with the endemic insecurity of the financial markets. Zero-coupon tax-free bonds can provide certainty in an uncertain world. They are one of a handful of investments that grow and provide a fixed payoff at a specific date. In essence, zero-coupon bonds are investment tools that force the investor to accumulate wealth.
Lanton is a strong advocate of teaching investors about the power of compound interest. Compound interest is the interest calculated on the initial principal and also on the accumulated interest credited to the principal from previous periods of the investment. Often referred as "interest on interest" it enables an investment to grow at a faster rate than simple interest, which is interest calculated only on the principal.
"In today's historically low interest rate environment, zero-coupon bonds help eliminate investment risk when investors hold their bonds to maturity," Lanton declares. "Interest earned on zero-coupon bonds is reinvested back into the bond and the interest rate of the reinvestment represents the investment's yield to maturity. The compounding continues until maturity when the bondholder receives back the face value of the bond."
Lanton provides the following six key reasons why investors should include Zero-coupon tax-free bonds in their portfolios:
1.Exact Investment Value: At a fixed future date the investor knows exactly how much money she will receive. If the bond is not in default and is not callable (redeemable by the issuer prior to its maturity) she will receive the full face value of the bond.
2.Powerful Compounding: The interest on the bond is compounded. That is how a hypothetical $50,000 investment today in a good quality Zero-Coupon Tax-free bond can grow to $100,000 in 18 years. Albert Einstein said, "Compound interest is the eighth wonder of the world. He, who understands it, earns it…he who doesn't... pays it."
3.Known Reinvestment Rate: The reinvestment rate of the bond is certain. An investor knows exactly the interest rate that will be earned on the "accumulated interest." Interest from Zero -coupon bonds are automatically reinvested at an interest rate that equals the bond's yield to maturity.
4.Attractive Tax Benefits: Interest earned on the bond held is 100% free of Federal Income Taxes and in certain instances may be also free of state and local taxes.
5.Cash Flow Control: Knowing upfront the exact amount that a zero-coupon bond will pay at its maturity date empowers investors with the ability to count on a known cash flow at a specific date. This certainty may provide investors with the comfort and confidence they may need to increase the stock allocation of their portfolio and also provide a cushion during difficult periods in the financial markets.
6.Forced Wealth Accumulation: Investors are certain to accumulate wealth at an increasing rate. Investing $50,000 today in a 20 year zero-coupon bond with a 3.5% interest rate will accrue $1,764 ($1,750 interest + $14 interest on interest) at the end of the first year. In the second year the interest accrued will be $1,826 ($1,811.74 interest + $14.26 interest on interest). This magic of compounding interest will continue until year twenty when the investor will receive payment in the amount of the full face value of the bond.
Lanton concludes by warning investors that the cash flows and federal tax free status of a zero coupon tax-free bond are applicable only if the bond is held until its maturity and the issuer remains in good standing. Investors must keep in mind that the credit quality of the bonds selected matters. Zero-coupon bonds are backed by the full faith and credit of the issuer. Prior to maturity the market price of the bond will fluctuate especially with changes in interest rates. Therefore, if a bond is sold prior to maturity, it may be worth more or less than the original investment, and an investor may be subject to capital gains or losses.
About Lantern Investments, Inc.
Based in Melville, NY, Lantern Investments, Inc. is a wealth management firm that educates and guides multi-generational clients to achieve their financial goals by managing risk, growing assets and preserving wealth. The firm has offices in Westbury, NY, Chicago, IL, Houston, TX, San Francisco, CA and Hoboken, NJ.
For more information call 631-454-2000 or visit http://www.lanternwealth.com
About Keith Lanton
Keith Lanton is the President of Lantern Investments. He works with clients to develop optimal asset allocations and investment portfolios that factor in the clients risk profile and income needs. He has appeared on financial radio shows, been quoted in newspapers and industry publications and also served on numerous investment panels and forums. He can be reached at firstname.lastname@example.org