1. What is a Zero Coupon Bond?

A zero-coupon bond is a debt security that doesn't pay periodic interest (coupons) but is issued at a discount to its face value. The investor receives the face value at maturity, with the difference representing the interest earned.

2. How Does the Calculator Work?

The calculator uses the zero-coupon bond pricing formula:

Where:

• \( P \) — Bond price (currency units)
• \( F \) — Face value (currency units)
• \( r \) — Yield to maturity (decimal)
• \( n \) — Years to maturity (years)

Explanation: The formula discounts the future face value back to present value using the yield to maturity as the discount rate.

3. Importance of Bond Pricing

Details: Accurate bond pricing is essential for investors to determine fair value, assess investment opportunities, and manage fixed-income portfolios effectively.

4. Using the Calculator

Tips: Enter face value in currency units, yield to maturity as a decimal (e.g., 0.05 for 5%), and years to maturity. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What is the main advantage of zero-coupon bonds?
A: They eliminate reinvestment risk since there are no periodic coupon payments to reinvest at potentially lower rates.

Q2: How are zero-coupon bonds taxed?
A: In many jurisdictions, imputed interest is taxed annually as it accrues, even though no cash is received until maturity.

Q3: What happens if I sell before maturity?
A: The selling price will depend on prevailing interest rates and the remaining time to maturity.

Q4: Are zero-coupon bonds risk-free?
A: No, they carry interest rate risk (price sensitivity to rate changes) and credit risk (issuer default risk).

Q5: How does inflation affect zero-coupon bonds?
A: They are highly sensitive to inflation expectations since the fixed return may be eroded by rising prices over time.