1. What is a Zero Coupon Bond?

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 bond's return comes from the difference between its purchase price and the face value paid at maturity.

2. How Does the Calculator Work?

The calculator uses the zero coupon bond formula:

Where:

• \( PV \) — Present value (price you should pay today)
• \( FV \) — Face value (amount paid at maturity)
• \( r \) — Yield or discount rate per period (as decimal)
• \( n \) — Number of periods until maturity

Explanation: The formula discounts the future face value back to present value using the yield rate over the bond's term.

3. Importance of Bond Valuation

Details: Accurate bond valuation helps investors determine fair prices, compare investment opportunities, and assess portfolio risk.

4. Using the Calculator

Tips: Enter face value in dollars, yield as decimal (e.g., 5% = 0.05), and number of periods. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: Why invest in zero coupon bonds?
A: They offer predictable returns and are often used for specific future financial needs due to their fixed maturity value.

Q2: How does yield affect bond price?
A: Higher yields result in lower present values - bond prices move inversely to interest rates.

Q3: What's the difference between periods and years?
A: If yield is annual and bond matures in years, periods = years. For semiannual yields, periods = years × 2.

Q4: Are zero coupon bonds risk-free?
A: No, they carry interest rate risk and issuer default risk like other bonds.

Q5: What about taxes on zero coupon bonds?
A: In many jurisdictions, imputed interest is taxable annually even though no cash is received.