Zero coupon bond yield calculator
Although the lack of current income provided by zero-coupons bond discourages some investors, others find the securities ideal for meeting long-range financial goals like college tuition.
Zero Coupon Bonds
The deep discount helps the investor grow a small amount of money into a sizeable sum over several years. Because zero-coupon bonds essentially lock the investor into a guaranteed reinvestment rate , purchasing zero-coupon bonds can be most advantageous when interest rates are high.
They are also more advantageous when placed in retirement accounts where they remain tax-sheltered. Some investors also avoid paying taxes on imputed interest by buying municipal zero-coupon bonds, which are usually tax-exempt if the investor lives in the state where the bond was issued.
The lack of coupon payments on zero-coupon bonds means their worth is based solely on their current price compared to their face value. Thus, prices tend to rise faster than the prices of traditional bonds when interest rates are falling, and vice versa. The locked-in reinvestment rate also makes them more attractive when interest rates fall. Our in-depth tools give millions of people across the globe highly detailed and thoroughly explained answers to their most important financial questions.
Bond Pricing
Each month, more than 1 million visitors in countries across the globe turn to InvestingAnswers. For example, if the bond issuer will pay the bond holder the face value of the bond in five years, then the time-to-maturity is five. Take the sum calculated in Step 1 above and raise it to the power of the remaining time period.
The price of a zero-coupon bond can be calculated by using the following formula: Zero-coupon bonds are usually long-term investments ; they often mature in ten or more years. Once a bond has been stripped, a trustee directs the appropriate amount of the interest or maturity payment to the security holders. Many bonds make periodic interest payments during the life of the bond, and then when the bond matures, the principal is returned. Price after trial Starting Price starting today. On a calculator, you would multiply 1.
On a calculator, you would multiply 1. Divide the par face value of the bond by the result of the previous step. The par value of the bond is the amount that the bond issuer will pay to the bond holder when the bond matures. Does a zero-coupon bond have compounding frequencies such as quarterly or monthly; if there is a specific compounding frequency, how is the YTM computed?
Answer this question Flag as Include your email address to get a message when this question is answered. Already answered Not a question Bad question Other. Warnings Make sure that the required rate of return and the number of time periods remaining until maturity are measured in the same units of time.
Traditionally, the required rate of return or required yield on a corporate bond can be calculated as follows:. An on-the-run Treasury bond yield is usually used as a risk-free rate provided it compares with the corporate bond maturity date.
The lower the credit rating, the higher the risk premium and vice versa. The minimum semiannual yield that the investor would accept is 6. To find the fair value of a bond, we should calculate the semiannual coupon payment and apply the formula above.
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A zero-coupon bond does not have any coupon payments. It is sold at a lower price than the par value, and the par value will be repaid to the investor at maturity.
