A zero bond or a zero coupon bond is an investment with a long term. In contrast to other bonds and securities, there is no annual distribution of interest income. The return is paid out in full at the end of the term.
A distinction is made between two types of zero bonds, the present value and the nominal value:
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Most zero bonds are issued at cash value. This means that the interest is calculated back from a certain target value of the bond. This target value, also known as the nominal value, is already known when the bond is purchased. The difference between the present value and the nominal value then represents the return for the buyer of the bond. For the issuer (issuer) of the bond, this difference represents a discount.
Other zero bonds are issued at a nominal value, i.e. nominal value, which, like other securities, earns interest over the term at a certain interest rate. In contrast to other securities, the annual interest income is not paid out but rather accumulated and only paid out at the end of the term. This is why these types of zero bonds are also called interest collectors.
Advantages for buyers of zero bonds
With zero bonds, there are various advantages for the investor. Since there are no annual interest payments and the bond has a long term, the investor's time investing in maintaining his investment is extremely limited.
Likewise, he does not have to worry about the taxation and reinvestment of annual interest income. In addition, the investor benefits from the interest rate stability. The decisive factor here is the interest rate when the bond is concluded. The following fluctuations in interest rates in the market are irrelevant for the investor. In addition, zero bonds offer a high degree of planning security due to the advantages mentioned above.
The disadvantages for the investor
The advantage that the investor is not disadvantaged by falling interest rates is reversed when interest rates rise in the market. In addition, investors lose more liquidity with zero bonds than with other investments because they forego annual interest income.
In addition, due to the long term, the investor is dependent on a high level of liquidity from the issuer, as this increases the risk of the issuer becoming insolvent and thus a possible total loss.