1. What is a Zero Coupon Bond?

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

2. How Does the Calculator Work?

The calculator uses the zero-coupon bond formula:

Where:

• \( \text{Face Value} \) — The bond's value at maturity
• \( \text{Price} \) — Current purchase price of the bond
• \( n \) — Years to maturity

Explanation: The formula calculates the implied annual interest rate that equates the present value (price) to the future value (face value).

3. Importance of Interest Rate Calculation

Details: Calculating the implied interest rate helps investors compare zero-coupon bonds with other investment options and assess their true yield.

4. Using the Calculator

Tips: Enter the bond's face value, current price, and years to maturity. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Why buy zero-coupon bonds?
A: They offer predictable returns and are often purchased for future financial needs like education expenses.

Q2: Are zero-coupon bonds risk-free?
A: No, they carry interest rate risk and issuer default risk like other bonds.

Q3: How is this different from coupon bond yield?
A: This calculates the implied yield for bonds with no periodic payments, while coupon bonds factor in regular interest payments.

Q4: What about taxes?
A: In many jurisdictions, imputed interest on zero-coupon bonds is taxable annually as it accrues.

Q5: Can this formula be used for other investments?
A: Yes, it can calculate compound annual growth rate (CAGR) for any investment with a single future payout.