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Zero Coupon Bond Price Formula:
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Zero coupon bond price calculation determines the present value of a bond that pays no periodic interest but is sold at a discount to its face value. The bond's return comes from the difference between its purchase price and the face value received at maturity.
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.
Details: Accurate pricing of zero coupon bonds is essential for investors, financial analysts, and portfolio managers to determine fair value, assess investment opportunities, and manage fixed income portfolios effectively.
Tips: Enter the bond's face value in dollars, yield to maturity as a decimal (e.g., 0.05 for 5%), and maturity in years. All values must be positive numbers.
Q1: What is a zero coupon bond?
A: A zero coupon bond is a debt security that doesn't pay periodic interest but is issued at a discount to its face value and redeemed at face value at maturity.
Q2: How does YTM affect bond price?
A: Higher YTM results in lower bond prices, and vice versa. There's an inverse relationship between yield and price.
Q3: What are typical uses of zero coupon bonds?
A: They're often used for long-term financial goals like education funding or retirement planning, as they provide known future values.
Q4: How does maturity affect zero coupon bond prices?
A: Longer maturities generally mean greater price sensitivity to interest rate changes and deeper discounts from face value.
Q5: Are zero coupon bonds taxable?
A: In many jurisdictions, the imputed interest (the difference between purchase price and face value) is taxable annually, even though no cash interest is received.