Retirement,zeros

BOND RETIREMENT FEATURES & ZERO COUPON BONDS

BOND RETIREMENT FEATURES

Being Paid-off @ maturity.	The bond matures naturally.
Retired Serially	Serial bonds mature at different dates rather than all at once. A portion of the issue is retired annually throughout the bond's term. Investors can pick maturity dates to meet their needs.
Retired by Sinking Fund	Additional protection to bond holders; a sinking fund forces the issuing company to set aside funds during the bond's term. At maturity, the company has saved the money necessary to retire the principal.
Being Called by the issuer before stated maturity.	Corporate Treasurers are no dummies, they install Call Features into the Indenture to protect the company from interest rate risk. An example being if the company borrows money in a high interest rate environment and interest rates fall, as they have in year 2001; the company can refinance the issue as a person would refinance their house to take advantage of the lower rates. If the bond is FREELY CALLABLE, the investor has NO CALL PROTECTION. The company can call the bond at any time. If the bond is NON CALLABLE, the investor has FULL PROTECTION against the call. The bond will not be retired until it matured. If the bond has a DEFERRED CALL - The investor has LIMITED CALL PROTECTION. The bond may be called within the first 5 years or the last half of its life. Those are examples. The company can name its call features, they have to be spelled out in the Indenture.

ZERO COUPON BONDS

ZERO's Earn interest during the bonds life. They are sold at a "deep discount" from the face amount and mature at face. For example, a zero may be sold for $200 and mature, 20 years later at $1000. The owner gets no interest during that time (hence the name, ZERO coupon).

The primary disadvantages of owning Zero's:

•Taxes are paid on earnings annually as if interest was received. The investor will be billed annually for the 'accreted' or accumulated value of the bond.

•Zero's can experience violent price swings more than a coupon bond due to their having no periodic coupon payments to buffer changes in market interest rates. These violent price swings could be used as a distinct advantage for the bondholder, zeros could be purchased when there is an expectation of falling interest rates. When the rates fell, zero prices would rise more than coupon bonds.