The Zero Coupon Bond: Pricing and Charactertistics
Zero coupon bonds are predominantly issued by the federal government, and typically, they are issued with maturities of years. Zero coupon bonds are traded on recognized financial markets and exchanges, which may offer investors liquidity in the event they choose not to hold them to maturity. One of the biggest risks of zero coupon bonds is their sensitivity to swings in interest rates. In a rising interest rate environment, their value is likely to fall more than other bonds.
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For individuals, zero coupon bonds may serve several investment purposes. July Bond market.
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Risks can include the potential for default the bond issuer being unable to pay back the bond holder or the risk of a future increase in the interest rate of new bonds, which will decrease the attractiveness relative value of the present bond. Also the longer the remaining time until the bond matures and pays out its final value, the riskier the bond is simply because of the increased potential for payout problems inherent in longer periods of time. Thus, for purposes of this formula, you would add 1 to 0.
Determine the number of time periods years in this case remaining until the bond matures. For example, if the bond issuer will pay the bond holder the face value of the bond in five years, then the time-to-maturity is five. Take the sum calculated in Step 1 above and raise it to the power of the remaining time period.
Example of Zero Coupon Bond Formula
Thus, 1. On a calculator, you would multiply 1.
Divide the par face value of the bond by the result of the previous step. The par value of the bond is the amount that the bond issuer will pay to the bond holder when the bond matures.
tax-marusa.com/order/sulipaco/localiser-mon-telephone-avec-mon-pc.php Include your email address to get a message when this question is answered. Already answered Not a question Bad question Other. Warnings Make sure that the required rate of return and the number of time periods remaining until maturity are measured in the same units of time.
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