1. What is Zero Coupon Bond YTM?

The Yield to Maturity (YTM) of a zero-coupon bond is the internal rate of return earned by an investor who buys the bond today at the market price and holds it until maturity. Unlike coupon bonds, zero-coupon bonds don't make periodic interest payments.

2. How Does the Calculator Work?

The calculator uses the zero-coupon bond YTM formula:

Where:

• \( FV \) — Face value of the bond ($)
• \( PV \) — Present value or purchase price of the bond ($)
• \( n \) — Time to maturity in years

Explanation: The formula calculates the compound annual growth rate that equates the present value to the future value over the bond's term.

3. Importance of YTM Calculation

Details: YTM is crucial for comparing different fixed-income investments, assessing bond pricing, and making investment decisions. It represents the annualized return if the bond is held to maturity.

4. Using the Calculator

Tips: Enter the bond's face value, current market price, and time to maturity in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Why is YTM important for zero-coupon bonds?
A: Since zero-coupon bonds don't pay periodic interest, YTM is the only measure of return for these instruments.

Q2: How does YTM relate to bond prices?
A: YTM and bond prices have an inverse relationship - when YTM rises, bond prices fall, and vice versa.

Q3: What's the difference between YTM and current yield?
A: Current yield only considers annual coupon payments relative to price, while YTM accounts for all cash flows including final repayment.

Q4: Does YTM assume reinvestment of coupons?
A: For zero-coupon bonds this isn't applicable, but for coupon bonds YTM assumes coupons are reinvested at the YTM rate.

Q5: Why might actual returns differ from YTM?
A: Actual returns may differ if the bond is called early, defaults, or if reinvestment rates differ from YTM.