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Zero Coupon Bond Formula:
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A zero-coupon treasury bond is a type of bond that does not pay periodic interest payments. Instead, it is issued at a discount to its face value and pays the full face value at maturity. The difference between the purchase price and the face value represents the investor's return.
The calculator uses the zero-coupon bond pricing formula:
Where:
Explanation: The formula discounts the future face value back to present value using the yield to maturity as the discount rate over the bond's remaining life.
Details: Accurate bond pricing is essential for investors to determine fair value, assess investment opportunities, and make informed decisions about buying or selling bonds in the market.
Tips: Enter the bond's 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 numbers.
Q1: What is the main advantage of zero-coupon bonds?
A: Zero-coupon bonds offer predictable returns and eliminate reinvestment risk since there are no periodic coupon payments to reinvest.
Q2: How does yield to maturity affect bond price?
A: Higher yields result in lower bond prices, and vice versa. There is an inverse relationship between yield and price.
Q3: Are zero-coupon bonds risk-free?
A: While treasury bonds have minimal default risk, they still carry interest rate risk - prices fall when market interest rates rise.
Q4: What is the tax treatment of zero-coupon bonds?
A: In many jurisdictions, investors must pay taxes on imputed interest (the annual accretion) even though no cash is received until maturity.
Q5: How does time to maturity impact bond price volatility?
A: Longer-term bonds are more sensitive to interest rate changes, meaning their prices fluctuate more for a given change in yields.