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How To Calculate Zero-coupon Bonds For Beginners by Joanne07: 8:57am On Dec 16, 2022 |
Standard Terms Used In Calculating Zero Coupons PV = Price Value FV = Future Value YTM = Yield-to-Maturity (YTM) t = Number of Compounding Periods R= rate of returns or interest rate M= Date of maturity N = Number of Years until Maturity How to calculate Zero-Coupon Bonds The formula for calculating the present value of a zero coupon bond: P^(1-YTM)=FV For instance: You buy a one year zero coupon bond for $95,238 and the face value of the bond is $100,000. Note that because it is zero coupon bond, you will not earn any periodically interest payment. Instead upon maturity, the difference between the face value of the bond which is $100,000 and the $95,238 is considered the interest you have earned Answer: Face value: $100,000. Present value: $95,238 N: Number of years : 1year. P^(1-YTM)=FV $95,238 ^(1+YTM)= $100,000. 1+ YTM= 100,000/95,238 1+ YTM= 1.05 YTM= 1.05 -1 = .05 YTM = 5%. Read link for full guidance: https://xenofinance.com/zero-coupon-bonds-for-beginners/ |
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