FINANCIAL FOCUS: CONSIDER 'ZERO COUPONS' FOR MEETING SPECIFIC GOALS

This "Financial Focus" column is prepared by Edward Jones Investments, headquartered in St. Louis. Jones includes branches throughout the nation, including Cape Girardeau and Jackson.

Do you have a time-specific investment goal in mind? Maybe you want to send your child to college in 18 years. Or maybe you want to buy a summer home in 10 years. If so, then you might want to consider the number zero -- as in zero coupon bonds.

What's the difference between a zero coupon bond and a regular bond? When you buy a conventional bond, you receive interest payments on a regular basis over the life of the bond. When the bond matures, you'll receive the bond's "par value," typically $1,000.

When you purchase a zero coupon bond, you receive a deep discount from its face value, and you receive no interest payments during the bond's lifetime. When it matures, you receive the full face amount -- your initial investment plus the accumulated interest compounded over the life of the bond. And if you purchase a zero coupon bond that's issued by a state or local government entity, the interest you earn will compound free of federal taxes, and possibly state and local taxes, as well.

Suppose, for example, that you've just had your first baby and you want to start a college savings plan. You estimate college costs will be about $40,000 a year when your child enrolls for college in 2018, and you assume a four-year degree program. You could buy $160,000 worth of face-amount government-agency zeros due in 2018, at a cost of $46,000 today, assuming a 7 percent semiannual yield.

Zero coupon bonds are issued by the U.S. Treasury government-sponsored enterprises, corporations and municipalities. Zero coupons issued by the Treasury are generally considered the safest, because they're backed by the U.S. government. But municipal zeros also offer a high degree of safety, and, because the interest they provide is typically tax-exempt, their total return may be higher than Treasuries. However, municipal zeros may be subject to the alternative minimum tax.

If you purchase a zero coupon bond that is not tax-exempt, you need to be aware that, even though you don't receive interest payments while you hold the bond, you still must pay income taxes each year on the interest. That's why you may want to consider putting a taxable zero coupon bond on an IRA, 401 (k) or other tax-deferred retirement plan. If you do this, however, make sure to consult with your tax adviser beforehand. In fact, it's a good idea to see your tax adviser before you even purchase a zero coupon bond.

You can find zero coupon bonds in maturities ranging from one to 40 years, although most of them mature in 20 years or less. That's why zero coupons have the flexibility to help you plan for a variety of financial goals. And, since you invest a relatively small amount up front, you may be able to afford more than one zero coupon at a time.

In the investment world, the word "zero" doesn't sound like much. But it can be just the number you're looking for when you know how much you're going to need -- and when you're going to need it.

The Southeast Missourian does not recommend that readers buy or sell stocks featured in this column, which is provided for informational purposes only.