1. What is Yield to Maturity for Zero Coupon Bonds?

Yield to Maturity (YTM) for zero coupon bonds represents the annualized rate of return an investor would earn if the bond is held until maturity. Unlike coupon bonds, zero coupon bonds don't pay periodic interest but are sold at a discount to their face value.

2. How Does the Calculator Work?

The calculator uses the YTM formula for zero coupon bonds:

Where:

• \( FV \) — Face value of the bond ($)
• \( Price \) — Current market price of the bond ($)
• \( n \) — Time to maturity in years

Explanation: The formula calculates the compound annual growth rate that equates the present value (price) to the future value (face value) over the bond's term.

3. Importance of YTM Calculation

Details: YTM is a crucial metric for bond investors as it allows comparison between different fixed-income investments and helps assess the true return potential of zero coupon bonds.

4. Using the Calculator

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

5. Frequently Asked Questions (FAQ)

Q1: What is a zero coupon bond?
A: A zero coupon bond is a debt security that doesn't pay periodic interest but is sold at a discount to its face value, with the full face value paid at maturity.

Q2: How does YTM differ for zero coupon vs coupon bonds?
A: For zero coupon bonds, YTM represents the total return from price appreciation only, while coupon bond YTM includes both price appreciation and coupon payments.

Q3: What factors affect zero coupon bond YTM?
A: Market interest rates, credit risk of the issuer, time to maturity, and inflation expectations all influence zero coupon bond yields.

Q4: Are zero coupon bonds risk-free?
A: No, they carry interest rate risk (price volatility) and credit risk (issuer default risk) like other bonds.

Q5: How is YTM expressed?
A: YTM is typically expressed as an annual percentage rate, which can be compared with other investment opportunities.