What Is a Zero Coupon Bond Formula?

Zero-coupon bonds are bonds that are issued on a discounted basis, without coupons, and pay a one-off principal and interest at face value on the maturity date. Zero coupon bonds are a more common financial instrument innovation. However, changes in tax law have affected market enthusiasm.

Zero coupon bonds

Zero coupon

A new kind of foreign appeared in the 1980s

Its specific characteristics are:

Zero coupon bonds are discount securities. They do not pay any interest (coupons) throughout the life of the loan and are bought at a discounted face value of redemption on the maturity date. The difference between the purchase price and the face value of the redemption at maturity is capital appreciation, so:

Bid price = face value-capital appreciation