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 its face value at maturity.

2. How Does the Calculator Work?

The calculator uses the zero coupon bond pricing formula:

Where:

• \( FV \) — Face value of the bond ($)
• \( ytm \) — Yield to maturity (as a decimal)
• \( n \) — Years to maturity

Explanation: The formula discounts the bond's face value back to the present using the yield to maturity as the discount rate.

3. Importance of Bond Pricing

Details: Accurate bond pricing is essential for investors to determine fair value, assess potential returns, and make informed investment decisions.

4. Using the Calculator

Tips: Enter the bond's face value in dollars, yield to maturity as a percentage, and years to maturity. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: Why do zero coupon bonds sell at a discount?
A: Since they don't pay periodic interest, their entire return comes from the difference between purchase price and face value at maturity.

Q2: How does yield to maturity affect bond price?
A: Higher yields result in lower bond prices, and vice versa, due to the inverse relationship in the pricing formula.

Q3: Are zero coupon bonds more sensitive to interest rate changes?
A: Yes, they typically have higher duration than coupon bonds of similar maturity, making them more sensitive to rate changes.

Q4: What are the tax implications of zero coupon bonds?
A: In many jurisdictions, imputed interest is taxable annually even though no cash payments are received.

Q5: Where are zero coupon bonds commonly used?
A: They're often used in retirement planning, education savings, and by institutions with future liabilities to match.