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 value is calculated based on its face value, time to maturity, and prevailing interest rates.

2. How Does the Calculator Work?

The calculator uses the zero coupon bond formula:

Where:

• \( FV \) — Face value of the bond ($)
• \( r \) — Annual interest rate (as a decimal)
• \( n \) — Years to maturity

Explanation: The formula discounts the bond's face value back to the present using the interest rate and time period.

3. Importance of Bond Valuation

Details: Accurate bond valuation is crucial for investors to determine fair prices, assess investment opportunities, and manage fixed-income portfolios.

4. Using the Calculator

Tips: Enter the bond's face value in dollars, annual interest rate as a percentage (e.g., 5 for 5%), and 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 (coupon bonds) pay interest at regular intervals.

Q2: Why do zero coupon bonds sell at a discount?
A: Since they don't pay periodic interest, the entire return comes from the difference between purchase price and face value at maturity.

Q3: How does interest rate affect bond value?
A: Bond prices move inversely to interest rates - when rates rise, bond prices fall, and vice versa.

Q4: Are zero coupon bonds risk-free?
A: No, they carry interest rate risk and credit risk like other bonds, plus they're more sensitive to interest rate changes.

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