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)
• \( r \) — Annual interest rate (as a decimal)
• \( n \) — Years to maturity

Explanation: The formula discounts the future value back to present value using compound interest principles.

3. Importance of Present Value Calculation

Details: Calculating present value helps investors determine what price to pay for a zero coupon bond to achieve their desired yield. It's essential for comparing bonds with different maturities and rates.

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: Regular bonds pay periodic interest (coupons), while zero coupon bonds pay all return at maturity.

Q2: Are zero coupon bonds risk-free?
A: No, they carry interest rate risk and default risk like other bonds. Their prices are more sensitive to rate changes.

Q3: Who typically issues zero coupon bonds?
A: Governments and corporations issue them. U.S. Treasury STRIPS are a common example.

Q4: What about taxes on zero coupon bonds?
A: In many jurisdictions, imputed interest is taxable annually even though no cash is received (phantom income).

Q5: Can I sell a zero coupon bond before maturity?
A: Yes, but the price will depend on current interest rates and time remaining to maturity.