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Instead, the bond holder is rewarded with an increase in the value of the bond over time.

BAII Plus Bond Yield Calculations |

You can calculate the present value of a zero coupon bond using a formula involving the stated yield return , the par or face value, and the time until maturity when the bond's par or face value will be paid out to the bond holder. To create this article, volunteer authors worked to edit and improve it over time.

Zero Coupon Bonds

This article has also been viewed 61, times. Financial Bonds. Learn more. Learn more Add 1 to the required interest rate on the bond. The required interest rate or "yield-to-maturity" is the rate of return that a bond is presumed to require in order to entice investors to purchase the bond. Generally, bonds that are riskier will require a higher rate of return in order to attract buyers.

Risks can include the potential for default the bond issuer being unable to pay back the bond holder or the risk of a future increase in the interest rate of new bonds, which will decrease the attractiveness relative value of the present bond. Also the longer the remaining time until the bond matures and pays out its final value, the riskier the bond is simply because of the increased potential for payout problems inherent in longer periods of time.

Thus, for purposes of this formula, you would add 1 to 0. Determine the number of time periods years in this case remaining until the bond matures.

For example, if the bond issuer will pay the bond holder the face value of the bond in five years, then the time-to-maturity is five. Take the sum calculated in Step 1 above and raise it to the power of the remaining time period. Thus, 1. On a calculator, you would multiply 1. Divide the par face value of the bond by the result of the previous step. The par value of the bond is the amount that the bond issuer will pay to the bond holder when the bond matures.

Bond Yield to Maturity Formula

Unanswered Questions. Does a zero-coupon bond have compounding frequencies such as quarterly or monthly; if there is a specific compounding frequency, how is the YTM computed?

Zero Coupon Bond Yield Calculator

They are also more advantageous when placed in retirement accounts where they remain tax-sheltered. Some investors also avoid paying taxes on imputed interest by buying municipal zero-coupon bonds, which are usually tax-exempt if the investor lives in the state where the bond was issued. The lack of coupon payments on zero-coupon bonds means their worth is based solely on their current price compared to their face value.

Thus, prices tend to rise faster than the prices of traditional bonds when interest rates are falling, and vice versa. The locked-in reinvestment rate also makes them more attractive when interest rates fall.

Zero Coupon Bond Yield Calculator

Show 5 More. Our in-depth tools give millions of people across the globe highly detailed and thoroughly explained answers to their most important financial questions. Each month, more than 1 million visitors in countries across the globe turn to InvestingAnswers. Financial Dictionary Calculators Articles. Zero-Coupon Bond. What it is: How it works Example: Why it Matters: Popular Now.

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