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January 01, 2010 at 02:00 AM
The PIMCO 3-7 Year U.S. Treasury Index Fund (FIVZ) and the PIMCO25+ Year Zero Coupon U.S. Treasury Index Fund (ZROZ) were launched in November by the Newport Beach, Calif.-based money manager.
FIVZ follows the BofA Merrill Lynch 3-7 Year Treasury Index, which contains the bellwether 5-year Treasury note along with other Treasuries of similar duration. The fund pays dividend distributions and is rebalanced monthly. The fund’s annual expense ratio with fee waivers that expire on October 31, 2010 is 0.15 percent.
The performance and yield of ZROZ is benchmarked to the BofA Merrill Lynch Long US Treasury Principal STRIPS Index. Dividend payments and index rebalancing are scheduled to occur quarterly. After calculating fee waivers that expire on Oct. 31, 2010, ZROZ charges annual expenses of 0.15 percent.
Zero-coupon bonds come equipped with varying maturities as short as one year up to 40 years. “STRIPS” is an acronym for “Separate Trading of Registered Interest and Principal of Securities.” It means a financial institution has taken a regular U.S. Treasury issue and separated the principal and interest payments into two separate securities.
Here are other important characteristics of zero coupon bonds: They’re issued at a deep discount and redeemed at full face value. Annual taxes are due on interest payments even though they’re not received until maturity. Zero coupons tend to be more volatile than conventional bonds. Zero coupons tend to be more sensitive to interest rate changes.
