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Zero Discount Bond Formula:
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A zero discount 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 face value at maturity, with the difference representing the interest earned.
The calculator uses the zero discount bond pricing formula:
Where:
Explanation: The formula calculates the present value of the bond's face value, discounted at the given interest rate over the specified time period.
Details: Accurate bond pricing is essential for investors to determine fair value, assess investment opportunities, and make informed decisions about bond purchases and sales in financial markets.
Tips: Enter face value in currency units, interest rate as a decimal (e.g., 0.05 for 5%), and time in years. All values must be positive numbers.
Q1: What is the difference between zero discount bonds and regular bonds?
A: Zero discount bonds don't pay periodic interest but are sold at a discount, while regular bonds pay periodic coupon payments and return face value at maturity.
Q2: How does interest rate affect bond price?
A: Bond prices move inversely to interest rates. When rates rise, bond prices fall, and vice versa.
Q3: What is the relationship between time to maturity and bond price?
A: Longer time to maturity generally means greater price sensitivity to interest rate changes (higher duration).
Q4: Can this calculator be used for other types of bonds?
A: This calculator is specifically designed for zero discount bonds. Other bond types require different pricing models that account for periodic coupon payments.
Q5: What are the risks associated with zero discount bonds?
A: Main risks include interest rate risk, inflation risk, and credit risk of the issuer defaulting on the face value payment at maturity.