1. What is a Zero Coupon Treasury Bond?

A zero-coupon Treasury bond is a debt security that doesn't pay interest but is issued at a discount to its face value. The bond's value appreciates over time until maturity when it's redeemed for its full face value.

2. How Does the Calculator Work?

The calculator uses the zero-coupon bond formula:

Where:

• \( Face\ Value \) — The bond's value at maturity
• \( r \) — The annual yield or discount rate
• \( n \) — Number of years until maturity

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

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 face value in dollars, yield rate as a decimal (e.g., 0.05 for 5%), and years to maturity. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Why invest in zero-coupon bonds?
A: They offer predictable returns and are often used for specific future financial needs due to their known maturity value.

Q2: How are zero-coupon bonds taxed?
A: In the U.S., imputed interest is taxable annually as ordinary income, even though no cash payments are received.

Q3: What's the difference between yield rate and coupon rate?
A: Zero-coupon bonds have no coupon rate - the yield represents the total return based on purchase price and face value.

Q4: Are zero-coupon bonds risk-free?
A: While Treasury zeros have no credit risk, they still carry interest rate risk - prices fall when rates rise.

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.