- Low administration costs
Compared to securities with an annual interest rate, you as an investor only have to worry a little about zero bonds. Since the payment is only made in a lump sum at the end of the term and no interest is paid beforehand, you also do not have to plan a reinvestment every year and find out about the current conditions for this.
- No reinvestment risk
Closely related to this is the non-existent reinvestment risk with zero bonds. This is the case with other securities, as the general interest rate level can fall and there is therefore the risk of having to invest the interest income at poorer conditions. With a zero bond, on the other hand, the compound interest effect occurs because the interest rate remains constant and the interest is also invested again and again at this rate. Zero bonds are therefore a worthwhile form of investment precisely when the general interest rate level falls during the investment period.
- High planning security
Since the yield is already known at the time of purchase, investors have a high degree of planning security and can plan the investment sum including interest income for a specific point in time. For example, it can be used to repay a loan or as a gift for a child who will receive the sum when he or she comes of age. In addition, it is also possible to provide for old age with zero bonds: by purchasing several bonds, which for example always mature at intervals of one year, investors receive a fixed and known sum each year in retirement.
- Sale possible at any time
In principle, as an investor you can decide to sell a zero bond at any time if you want to dispose of the amount because, for example, an important purchase becomes necessary. In this aspect they are similiar to CFDs in metatrader Exness. This guarantees a certain degree of flexibility, but it is highly likely that you will have to pay for this with a loss of return. This is because the sale then takes place at the conditions that currently apply. This means that the expected return is only guaranteed if you do not sell before the end of the term.
- Tax deferral effect
Due to the one-time payout at the end of the term, the interest income does not have to be taxed until that time. This increases the compound interest effect because the interest continues to accrue without tax being deducted.
Advantages for issuers
Zero bonds also offer advantages for the issuing company. For example, they allow longer maturities during which the money can be planned without interest obligations during this time.
The administrative burden of interest payments is also eliminated. However, for the issuer of a zero bond there is also a high one-off burden due to the complete repayment including interest at the end of the term.
Disadvantages for investors
- Lack of liquidity due to interest payments
You should bear in mind that no interest is paid out on a zero bond, so you do not profit from it in any way during the term, as is the case with other securities. Especially in phases that are difficult to assess financially, such as during the construction of a house, an annual payout can be more advantageous. This is because income is also available in the interim, which may be needed under certain circumstances.
- Lack of flexibility
The lack of flexibility may be a problem for some investors and is the flip side of the lack of reinvestment risk. Just as the accumulated interest payout at maturity is an advantage if interest rates fall in the meantime, it becomes a disadvantage if interest rates rise. In this case, the investment sum is tied up for a long period of time and the interest cannot be invested at the current more favourable interest rate either. Selling for the purpose of another investment will not be worthwhile in most cases because of the loss in yield.
- High volatility
Zero bonds have a high volatility, which means they are particularly susceptible to price fluctuations. This is due to the fact that no interest income is paid out: If the market interest rate falls, the price of the zero bonds rises; if, on the other hand, the market interest rate rises, the price of the zero bonds falls.
- Issuer creditworthiness is key
The creditworthiness of the issuing company is also of great importance to investors. In general, there is a default risk with bonds if the issuer becomes insolvent. In the case of a zero bond, however, this risk is particularly high due to the especially long term and the waiver of all interest payments during the term.
