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How To Calculate Zero-coupon Bonds For Beginners - Investment - Nairaland

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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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