Zero

A zero is a type of share or bond. Its key feature is that it pays no annual dividend, or coupon. Instead, the security is issued at a discount to its face value (also known as its par value), but is redeemed (bought back by the issuer) at face or par value.

The result is the holder should enjoy a capital gain over the life of the security. This type of instrument is often issued by split-capital investment trusts – some of the shares issued are ‘zeros’ and the rest ‘ordinary’.

Zeros are tax efficient – gains are typically taxed at the capital-gains tax rate of 18% – and so can be useful to an investor looking to pay a big future bill such as school fees. But there are risks. If, say, the issuer goes bust, the holder may get nothing back.

Merryn

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