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Zero Coupon Bond Formula:
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A zero coupon bond is a debt security that doesn't pay periodic interest but is issued at a discount to its face value. The bondholder receives the full face value at maturity, with the difference between purchase price and face value representing the interest earned.
The calculator uses the zero coupon bond pricing formula:
Where:
Explanation: This formula discounts the future value back to present value using compound interest principles.
Details: Accurate bond pricing is essential for investors to determine fair value, assess investment opportunities, and manage fixed-income portfolios effectively.
Tips: Enter the bond's face value in currency units, the annual interest rate as a decimal (e.g., 0.05 for 5%), and the time to maturity in years. All values must be positive.
Q1: What's the difference between zero coupon bonds and regular bonds?
A: Regular bonds pay periodic interest (coupons), while zero coupon bonds are purchased at a discount and pay no interest until maturity.
Q2: How are zero coupon bonds taxed?
A: In many jurisdictions, the imputed interest on zero coupon bonds is taxable annually as it accrues, even though no cash is received until maturity.
Q3: What happens to bond prices when interest rates change?
A: Bond prices move inversely to interest rates. When rates rise, bond prices fall, and vice versa. Zero coupon bonds typically have higher price volatility than coupon bonds.
Q4: Are zero coupon bonds risk-free?
A: No, they carry interest rate risk, inflation risk, and credit risk (if issued by corporations). Only government-issued bonds are considered virtually default-risk free.
Q5: Why would an investor choose zero coupon bonds?
A: They're popular for known future expenses (like college tuition) as they provide a guaranteed payout at a specific future date, and they typically offer higher yields than savings accounts for similar time horizons.