THE DOW JONES-IRWIN GUIDE TO ZERO COUPON INVESTMENTS

Owing in about equal measure to their versatility and Wall Street's merchandising skills, so-called zero-coupon securities have become perhaps the most popular single investment product since money market funds. In this first-rate guide, Nichols (Life Cycle Investing) provides a knowledgeable rundown on the risks and rewards of discounted debt instruments that pay interest only at maturity. The text is divided into two parts. The first surveys the different kinds of zeros available, of which the best known are derivative issues created by brokerage finns that strip coupon and principal payments from US Treasury obligations; many have feline designations, e.g., CATS (for Certificates of Accrual on Treasury Securities), LIONs (Lehman Investment Opportunity Notes), and TIGRs (Treasury Investment Growth Receipts). In addition, there are corporate and tax-exempt municipal bonds (some of which are convertible) in either original-issue-discount or zero-coupon form; depository institutions are in the game with zero-coupon CDs as are sponsors of mutual funds and unit investment trusts. Nichols includes pro-and-con briefings on the key features of zeros, On the plus side, there is predictability; instead of having to reinvest interest income on a piecemeal basis, holders can lock in compounded annual returns for up to 30 years--assuming, of course, they have adequate call protection. On the other hand, the IRS has ruled that annual income taxes must be paid on imputed interest, even though no cash is received until maturity. Aftermarkets in zeros tend to be more volatile than those for conventional fixed-income securities. And there's always the possibility that a renewal of double-digit inflation could erode the purchasing power of a zero's face value long before maturity. In the second section, Nichols goes over the many ways in which zeros can be gainfully employed in an investment program. Among the possibilities for zeros with taxable yields are IRAs, trusts, or other vehicles that permit deferral of tax liabilities. But the author also reviews innovative ways in which zeros can be used as means to current income, capital appreciation, lump-sum accumulation, savings, or other investment ends. So far, the best stand-alone overview of zeros on the market.