What is a zero coupon binding formula?
The zero coupon formula is a mathematical formula that helps investors to calculate how much money they can make for a zero coupon bond. The calculation of interest obtained on bonds with zero coupon includes a different formula because this type of bond does not pay interest with the same structure as other bonds. The bond formula with zero coupon is the value of the debt maturity, divided by the result of one plus the annual income of the investor after being divided by two years to the debt -due time.
As zero coupon bonds are operated, it differs from other bonds, because at the end of the bond term pays only a one -off amount. Other bonds pay coupons or payments that pay the publisher in the planned and regular times during the bond period. The bond formula with zero coupon must take into account and calculate all interest received by the bond, instead of charging regular bond earnings.
Given how structured the pattern of zero coupon bond, issuers of zero coupon bonds always sell bonds with a reduced rate. If the issuers were to sell bonds for normal nominal value because some other bonds could be sold, investors would not spend their money on bonds. The nature of the formula makes it impossible for investors to raise any money from investing in a bond unless it pays the nominal value of the bond.
In order to replace the investor's money binding, the zero coupon issuer usually reduces the price according to the maturity date of the bond. Bonds that have the due date on future sales for less than bonds with the same nominal value, but the due date that is not so far away. Investors risk buying a bond with a zero coupon with a long -term horizon, as the issuer can prolong the bond before the deadline. Unlike other bondsThe investor will not receive regular payments, so his investment would not receive anything.
When a person buys a bond with a zero coupon or any other type of bond, the bond issuer provides for certain conditions involved in the transaction. The investor must know what the interest rate of the bond will be, as well as the nominal value and due date, or the date on which the value of the bond is paid to the investor. Investors must not only use the zero coupon formula for calculating how much they earn, but they also have to pay income taxes on interest that the bond earns every year, even if they don't get any money until the bond has disappeared.