The benefits of investing in bonds or debt come from two factors: capital gains and coupons. Capital gain is the difference between the selling price and the purchase price of an instrument. Whereas the coupon is the profit the bond issuer will pay the investor.
However, there are currently other types of debt instruments that do not pay investors coupons. These bonds are known as zero coupon bonds. Where do investors’ profits come from? Check out the following discussion.
What are Zero Coupon Bonds?
Zero coupon bond (ZCB) is a type of bond that does not pay fixed coupons. Investors can buy zero-coupon bonds at a discount. and when the maturity date of the bond Investors are paid at face value. Therefore, this relationship is called deep discount bonds.
The face value is determined by the estimated compound interest that investors will earn at the expiration of the bond’s life.
For example, a company issues bond A to finance a project with a maturity of 20 years. The company estimates that with a current interest rate of 5.5% and a target bond price of Rs. 20,000,000, an investor can purchase Bond A for Rs.6,855,000.
The difference between Rp. 20,000,000 and Rp. 6,855,000 (up to Rp. 13,145,000) is the primary source of income for investors. Investors can also sell these securities on the secondary market before the maturity of the bond expires and when the price higher than the purchase price The goal is for him to receive funding.
These bonds can be issued by private companies. including central and local governments. However, Indonesian bond issuers have not issued this type of debt.
The difference in coupon bonds is zero with other bonds.
1. Coupon payment
The main difference between ZCB and bonds in general lies in the coupon payments. Ordinary bonds generally have fixed coupons that companies regularly pay to investors. While this type of bond does not have
Usually, the duration or maturity of a zero coupon bond is longer than a conventional bond. If the maturity of ordinary bonds is about 3-5 years, the maturity of this type of debt can be up to 10-15 years. However, there are also ZCBs with very short maturities (under 1 year) such as Treasury Bills. Long-term investment instruments
3. Volatility Level
Zero coupon bonds tend to have higher price volatility than conventional bonds. This is because it is a long time that prices may change due to interest rates and investors need to think twice before purchasing this tool. Therefore, there are only a few interested people.
Advantages and Disadvantages of Buying Zero Coupon Bonds
1. Don’t worry about market volatility.
because the interest rate is set Par Value and Age Investors can assess for themselves how much profit they will receive at the expiration date. The formula for calculating the price to estimate profit is
Bond investors have no coupons to pay. = face value (1 + desired interest rate)^ maturity in years To make the calculation easier, you can use compound interest calculator.
Of course, the amount of profit can be achieved only if you hold this instrument until the maturity date and do not sell it on the secondary market.
2. Long-term investment instruments other than stocks
in general Stocks are understood to be the only tool suitable for long-term investments. However, with ZCB, you can use this tool as a form of diversification. for better results Be sure to choose an issuer with a good credit score.
1. Income from ZCB is taxable.
from multiple sources This investment tool is not yet available in Indonesia. Income earned from this tool is also subject to income tax every year.
2. Interest rate risk
like Other types of bonds, ZCB prices are also affected by the benchmark interest rate. If the underlying interest rate increases The price of bonds will go down. This is because investors have options for new bonds or more attractive deposits. In fact, the drop in ZCB prices due to interest rate increases can be more intense than conventional bonds. The reason is because ZCB’s lifespan is long and there is little demand.
3. Inflation Risk
as mentioned above The amount of return or interest rate ZCB is set from the start. Before investors buy this instrument And usually this interest rate is based on a fixed (fixed) coupon system. For example, if only 5.5% per year, then within 20 years the investor will receive a price increase of only 5.5%. In fact, this interest rate must be greater than the inflation rate. because if the value is equal to inflation Investors will not be profitable. The problem is that a country’s inflation rate changes every year depending on the current economic conditions.
4. Low liquidity
due to many factors Demand for this type of bond therefore tends to be lower than that of others. This results in low liquidity levels as well. This means that you won’t be able to quickly withdraw or buy these types of bonds.
How to Choose a Zero Coupon Bond
There are several factors that you should consider when choosing this investment tool, namely:
- Interest Rates and Risks Offered. In general, the higher the interest rate offered. The higher the level of risk investors have to bear.
- Due date (age)Theoretically, the longer the bond’s life span The higher the return on the instrument, the greater.
- Issuer credit ratingYou can view this credit rating on the official website of PT.
- Liquidity Potential. Will most of the bonds be issued or not?
- Bond Use Potential and Financial Quality of Debenture IssuersBoth of these information can be found in the company’s debenture prospectus.
- Indonesia’s Future Economic Development PotentialThe goal is that you will know the estimated inflation rate of the country when you hold this instrument.
That’s the zero coupon bond debate. What if this instrument already exists in Indonesia? Will you buy it?