Zero Coupon Bond Pricing

What is a 'Zero-Coupon Bond'?

 

A zero-coupon bond, also known as an "accrual bond," is a debt security that doesn't pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value.

Some zero-coupon bonds are issued as such, while others are bonds that have been stripped of their coupons by a financial institution and then repackaged as zero-coupon bonds. Because they offer the entire payment at maturity, zero-coupon bonds tend to fluctuate in price much more than coupon bonds.

Zero Bond Price Formula
Zero Bond Price =
M
(1+i)n*2
Variables
M = value at maturity, or par value
n = number of years
i = market rate, or required yield

 

 

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