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 investor receives the full face value at maturity, with the difference representing the interest earned.

2. How Does the Calculator Work?

The calculator uses the zero coupon bond pricing formula:

Where:

• \( P \) — Current price of the bond
• \( FV \) — Future value (face value at maturity)
• \( r \) — Annual interest rate (as decimal)
• \( t \) — Time to maturity in years

Explanation: The formula discounts the future value back to present value using the given interest rate and time period.

3. Importance of Zero Coupon Bond Pricing

Details: Accurate pricing is essential for investors to determine fair value, assess investment returns, and make informed decisions about bond investments in the Malaysian market.

4. Using the Calculator

Tips: Enter the bond's face value in MYR, annual interest rate as a decimal (e.g., 0.05 for 5%), and time to maturity in years. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What are the advantages of zero coupon bonds?
A: They offer predictable returns, eliminate reinvestment risk, and are often cheaper than coupon bonds with the same maturity.

Q2: How are zero coupon bonds taxed in Malaysia?
A: The imputed interest is typically taxable as it accrues, even though no cash payments are received until maturity.

Q3: What happens if I sell before maturity?
A: The selling price will depend on prevailing interest rates. If rates have risen, you may sell at a discount to the calculated price.

Q4: Are zero coupon bonds suitable for retirement planning?
A: Yes, they can be excellent for matching future liabilities as the final value is known with certainty.

Q5: How does inflation affect zero coupon bonds?
A: Fixed returns make them vulnerable to inflation risk, as rising prices erode the purchasing power of the final payment.