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Arkansas college saving bonds: not just for kids.

Recently the Arkansas Development Finance Authority (ADFA) issued the first $30 million of an expected $200 million in zero coupon bonds that will be offered over the next several months. These bonds are widely distributed by most Arkansas investment dealers.

The money raised from the offering will be used to fund the purchase of equipment and capital improvements in libraries and facilities at state public universities and colleges. Through the purchase of these bonds, Arkansas residents have an opportunity to build tax-free funds for their children's college or for their own retirement.

Zero coupon bonds offer a fixed rate of return like other bonds, but do not pay interest until maturity. They are designed for those who wish to save today for a specific future amount.

Zeroes are purchased at a deep discount to their $1,000 face value. For example, you might purchase a zero coupon bond today for $500 that will mature in 10 years for $1,000. When you buy the bond, you know the maturity rate, the appreciation rate, and exactly what the bond will be worth at maturity. Zeroes offer no current income.

The difference between your purchase price and the bond's face value at maturity represents your return. The interest you earn from Arkansas College Savings Bonds is free from federal income taxes and, if you are an Arkansas resident, stare income taxes.

Arkansas College Zero Savings Bonds have several excellent applications that not only include providing education funds, but saving for retirement, starting a business or giving a gift to a loved one.

Parents can use zero coupon bonds to plan for their children's education cost by staggering the maturity for the year your child turns 18, 19, 20 and 21. In this way, you will have funds for each of the child's four years of college.

Because they are excellent long-term investments, zero coupon bonds can help meet your needs as an IRA alternative or other retirement planning investment. You can structure your maturity for your anticipated retirement date and then perhaps convert them to current interest bonds that pay interest every six months.

Zero bonds are also ideal for birthday, graduation or wedding gifts. When you give a zero coupon bond, you know your gift has built-in growth value.

Perhaps you have a long-term goal of starting your own business. You could invest in zero coupon bonds that mature in the year you expect to need start-up capital.

Individuals in the higher tax brackets should look to take advantage of this tax-free vehicle that offers good growth potential. An investor in the 36 percent tax bracket purchasing a bond paying 6 percent would actually receive a taxable equivalent yield of approximately 10 percent.

The wide range of maturities, 620 years, creates a vast degree of flexibility for investors with different time horizons and further demonstrates the variety of benefits to owning zero coupon bonds. Individuals concerned about the safety of their money should note that the bonds are general obligations of the state of Arkansas and the full faith and credit of the state is pledged for payment of the bonds.

Before buying Arkansas College Savings Bonds, one should contact a qualified financial or tax adviser to ensure tax-exempt investments and zero coupon bonds are suitable for their investment needs.
$1,000 Arkansas College Savings Bond Estimated Prices(*)

The chart below shows the approximate cost of a $1,000 Arkansas
College Savings Bond (zero coupon bond) with various maturities. The
actual prices of the bonds and their yields, however, are determined
by market conditions at the time of the bonds and their yields,
however, are determined by market conditions at the time of the

Years to
Maturity 5% 5.5% 6% 6.5%

5 Years $781 $762 $744 $726
10 Years 610 581 554 527
15 Years 477 443 412 383
20 Years 372 338 307 278

* For illustrative purposes only


James Martin is an investment broker with the Little Rock office of A.G. Edwards & Sons Inc.
COPYRIGHT 1995 Journal Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1995 Gale, Cengage Learning. All rights reserved.

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Author:Martin, James
Publication:Arkansas Business
Date:Sep 25, 1995
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