How do you calculate the present value of a zero-coupon bond?


How do you calculate the present value of a zero-coupon bond?

Below is the formula for calculating the present value of a zero coupon bond: Price = M / (1 + r)^n where M = the date of maturity r = Interest Rate n = # of Years until Maturity If an investor wishes to make a 4% return on a bond with $10,000 par value due to mature in 2 years, he will be willing to pay: $10,000 / (1 …

How do you calculate the present value of a coupon bond?

Coupon Bond = C * [1-(1+YTM)-n/YTM + P/(1+YTM)n]

  1. C = Periodic coupon payment,
  2. P = Par value of bond,
  3. YTM = Yield to maturity. In other words, a bond’s returns are scheduled after making all the payments on time throughout the life of a bond.
  4. n = No. of periods till maturity.

What is the market value of a zero-coupon bond with 5 years to maturity?

A 5 year zero coupon bond is issued with a face value of $100 and a rate of 6%. Looking at the formula, $100 would be F, 6% would be r, and t would be 5 years. After solving the equation, the original price or value would be $74.73. After 5 years, the bond could then be redeemed for the $100 face value.

What is the current yield on a zero-coupon bond?

For zero-coupon bonds selling at a discount, the coupon yield and current yield are zero, and the YTM is positive.

What is a zero-coupon bond example?

A zero-coupon bond is a bond that pays no interest and trades at a discount to its face value. It is also called a pure discount bond or deep discount bond. U.S. Treasury bills are an example of a zero-coupon bond.

How do you use the PV function in Excel?

The built-in function PV can easily calculate the present value with the given information. Enter “Present Value” into cell A4, and then enter the PV formula in B4, =PV(rate, nper, pmt, [fv], [type], which, in our example, is “=PV(B2,B1,0,B3).” Since there are no intervening payments, 0 is used for the “PMT” argument.

How do you calculate fair present value?

To determine the fair value of a bond one needs to find the present value of each cash flow separately, and then add all these present values to arrive at the fair price. The formula used to do so is as follows: P = C/(1+r) + C/(1+r)^2 + . . .

What is the yield on a 10 year zero-coupon bond?

United States – Fitted Yield on a 10 Year Zero Coupon Bond was 2.94% in July of 2022, according to the United States Federal Reserve. Historically, United States – Fitted Yield on a 10 Year Zero Coupon Bond reached a record high of 9.07 in September of 1990 and a record low of 0.59 in August of 2020.

What is the yield to maturity of a 2 year zero-coupon bond?

YTM on a one-year zero is currently 7%; on a two-year zero it is 8%.

What is the difference between zero-coupon and coupon bonds?

The difference between a regular bond and a zero-coupon bond is the payment of interest, otherwise known as coupons. A regular bond pays interest to bondholders, while a zero-coupon bond does not issue such interest payments.

What is the price of a 3 year zero-coupon bond with a par value of 1000?

(b) With a yield of 4.564%, the present value (that is, the price) of a three year zero-coupon bond with face value 1000 is: P = 1000/(1.04564)3 = 874.69.