On this page we define a Zero coupon bond and provide a formula for valuation of such bonds along with an example calculation to find valuation of zero coupon bonds.
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How do you define a zero coupon bond
Zero Coupon Bond makes no periodic interest payment but instead is sold at a steep discount from its face value. The valuation equation for zero coupon bond is a truncated version of that used for a normal interest paying bond. The present value of interest payments component is looped off, and we are left with value being determined solely by the present value of the principal payment at maturity.
What is the formula for Valuation of zero coupon bond?
Price=Par Value x (PVIFkd,n)
Calculation of Valuation of zero coupon bond
Suppose that Tequilla Corp. issues a zero coupon bond having a 12 year maturity and a $1,000 face value, Compute the Market price when required rate of return is 11%
