Zero-coupon bond

A zero coupon bond (referred to in shortening the English name " Zero Coupon Bond" in the German language also zero bond ) is a special form of income security. There are no coupon (ie no current coupon payment) and only one payment at the end of the term of the bond. The profit for the investor is that only in the difference between the acquisition price and the redemption price or sale price.

Forms of zero coupon bond

Two forms are important:

• The zero coupon bond in the classical sense. Here is paid at the end of the term of the face value of the bond. The issue price of the bond then has a correspondingly large discount.

• The interest collector is issued at par and he then collects the interest ( either fixed interest rates or the market interest rate adjusted interest rates ) up to the end of the term.

The zero coupon bond has a much less significant as compared with conventional coupon-bearing bonds. However, it is often used to represent the guaranteed part in guarantee funds or warranty certificates.

Assessment

The evaluation of the zero coupon bond shall be as follows:

In which

• I = true for the term of the bond market interest rate
• N = duration measured in periods

If you buy a zero coupon bond, for example, for € 50 (net present value ) and receive at the end of a 10 - year term for € 100 (nominal value), then this corresponds to an annual interest rate of about 7%:

Investment risks

Since a zero coupon bond during the term carried no pending cases and thus is not possible income reinvested, have zero coupon bonds, high volatility, ie the price of these securities react compared to a conventional ( coupon-bearing ) bond very strongly to fluctuations in market interest rates. In other words, the duration of a zero coupon bond is always the same and whose residual maturity and is therefore higher than the duration of a coupon-bearing bond. Thus, the zero-coupon bond has a comparatively high interest rate sensitivity.

This high interest rate sensitivity can be critical if an investor has to sell a paper with high residual maturity, and since buying the market interest rates have risen.

Benefits

In the privately investments by the taxation law of the Federal Republic of Germany a taxation of the income shall be only at maturity or prior sale of the securities, so that the implicit reinvestment of notional gross interest income is. The timing of the taxation of income can be aware during phases of low progression ( eg retirement phase) shifted.

Other jurisdictions, like the United States have abolished this tax loophole and tax for zero coupon investments an annual notional interest.

Treatment according to HGB

Zero coupon bonds are treated in accordance with HGB at amortized cost. Zero coupon bonds are financial innovations and are therefore taxed according to the emission or market return.