1. What is a Zero Coupon Bond?

A zero coupon bond is a debt security that doesn't pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value.

2. How Does the Calculator Work?

The calculator uses the zero coupon bond formula:

Where:

• \( PV \) — Present value or purchase price of the bond
• \( r \) — Annual interest rate (in decimal form)
• \( n \) — Number of years until maturity

Explanation: The formula calculates the compound interest growth of the bond's value over time.

3. Importance of Maturity Value Calculation

Details: Calculating the maturity value helps investors understand the potential return on investment and compare different bond options.

4. Using the Calculator

Tips: Enter the bond's purchase price (PV), annual interest rate (as percentage), and number of years to maturity. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between zero coupon bonds and regular bonds?
A: Zero coupon bonds don't make periodic interest payments, while regular bonds pay interest at regular intervals.

Q2: Are zero coupon bonds taxable?
A: Yes, in many jurisdictions the imputed interest is taxable annually as it accrues, even though no cash is received.

Q3: What happens if I sell before maturity?
A: The price will depend on current interest rates and time remaining to maturity, which may result in a gain or loss.

Q4: Why would someone buy a zero coupon bond?
A: They're often purchased for known future expenses (like college tuition) as the final value is predictable.

Q5: How sensitive are zero coupon bonds to interest rate changes?
A: They're more sensitive than coupon bonds because all the return comes at maturity (higher duration).