Zero bonds are bonds with a long maturity that do not pay out interest annually, but instead the investor receives a one-time full payout at the end of the maturity. Usually the nominal value of the bond is paid out at that time, because it is usually issued well below that value. The yield is the difference between the nominal value and the purchase price. These special features bring some advantages, but zero bonds are not suitable for every investor.
A zero bond is a bond that does not pay interest on an ongoing basis. Instead, the holder of the security receives a one-off payment at the end of the term. The zero bond is usually purchased well below the nominal value and the investor receives the amount of the nominal value at maturity.
The yield is therefore the difference between the issue price and the redemption price in thaiexness20.com/mt5, the latter being higher. The interest is in the difference, so one can say that zero bonds contain hidden interest - in contrast to the annual payment of interest with other bonds.
This special form of bond is characterised by a particularly long maturity, which can be up to 30 years and is at least ten years. Zero bonds are often issued by banks.
Who are zero bonds suitable for?
Such a zero-coupon bond is suitable for investors who can do without the investment amount for a longer period of time and who are also not dependent on or do not want to plan for the annual payment of interest. This type of bond also makes work easier for the holder, because he does not have to worry about how to invest it every year when the interest is paid out.
Another great advantage of the zero bond is that it can be planned: the yield can already be determined at the time of purchase. This makes these bonds particularly suitable for investors who want to have a certain amount of money at their disposal at a certain time in the future. This could be, for example, retirement or the coming of age or the start of studies of one's own child.
A zero bond, on the other hand, is not suitable for investors who want to retain a certain degree of flexibility. Although it is possible in principle to sell zero bonds, this often entails losses.
Investors who like to speculate and react to current developments with their investment behaviour in order to get the maximum return are also not well advised with a zero bond.
Types of zero bonds
Basically, two types of zero bonds can be distinguished. What both have in common is that no interest is paid out during the term. However, there is a decisive difference in the form of issue.
Issuance at present value
Issuing at present value is much more common with zero bonds, i.e. a zero-coupon bond in the classic sense. The nominal value (or face value) is already known at the time of issue. The cash value and thus the issue price is calculated by discounting, i.e. by calculating backwards from the nominal value over the term, so to speak.
For example, a zero bond with a nominal value of 1,000 euros and a term of five years can be issued at a present value of 821.93 euros. The interest rate is then four per cent.
Issuance at nominal value
However, there are also zero bonds that are issued at nominal value and thus have similarities with other securities. However, the interest is not paid out annually, but is accumulated and only distributed at the end of the term. This is why this type of zero bond is also called an interest collector.
The repayment is calculated by compounding the interest. For example, a zero bond with a nominal value of 1,000 euros can be issued that runs for ten years with an interest rate of four percent. The repayment amount is then 1,480.24 euros and is made in full at the end of the term.
