1.2 Zero-Coupon Government Bonds
The forecasted yield on the bonds as at 31 December 20X3 is 6. Find the value of the zero-coupon bond as at 31 December and Andrews expected income for the financial year 20X3 from the bonds. You are welcome to learn a range of topics from accounting, economics, finance and more.
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What are Zero Coupon Bonds? Who Should Invest in Them?
The difference between the price paid for the bond and the face value, known as a capital gain , is the return to the investor. The pricing formula for a zero coupon bond is:. What is the market price of this bond?
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In order to be consistent with coupon-bearing bonds, where coupons are typically made on a semi-annual basis, the yield will be divided by 2, and the number of periods will be multiplied by There are different types of yield measures that may be used to represent the approximate return to a bond. These include:. This equals the rate of return earned by a bond holder known as the holding period return if:.
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It is impossible to solve for the yield to maturity algebraically; instead, this must be done using a financial calculator or Microsoft Excel. The variables in brackets fv, type and guess are optional values; the value of type is set to zero if it is not specified. Guess can be used to provide an initial estimate of the rate, which could potentially speed up the calculation time.
Note that either pv or fv must be negative, and the other must be positive. The negative value is considered to be a cash outflow, and the positive value is considered to be a cash inflow.
Zero Coupon Bond Value - Formula (with Calculator)
Also note that entering semi-annual periods and coupon payments will produce a semi-annual yield; in order to convert this into an annual yield on a bond-equivalent basis , the semi-annual yield is doubled. For a bond that is callable, the yield to call may be used as a measure of return instead of the yield to maturity. The process is similar to computing yield to maturity, except that the maturity date of the bond is replaced with the next call date.
This is because yield to call is based on the assumption that the bond will be called on the next call date.
The face value is replaced with the call price since this is the amount that the investor will receive if the bond is called. What is the yield to call? In this case, the bond will mature in eight years, but it can be called in three years. The yield to call is computed as follows:. The current yield is simpler measure of the rate of return to a bond than the yield to maturity. The current yield is computed as:. This measure has the benefit of simplicity. It suffers from the drawback that it does not account for the time value of money.
Excel contains a set of specialized bond functions that can be used to account for several complications that arise in bond pricing, such as day-count conventions.
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Money market instruments e. Note that the settlement date and maturity date are represented as numerical values in Excel. The date January 1, is represented as 1; all later dates represent the number of days that have passed since January 1, As an example, suppose that a bond is sold on June 15, with a maturity date of June 15, Technology News Career Blog Calculator:bond price formulaHow do we calculate the YTM? TI 83 and bodylab24 gutscheincode januar TI 84 coupon rate calculator semi annual Bond Valuation What is the difference between a bond's coupon uniformes de pilotos mujeres rate and yield to maturity?
Face Value. Semi-annual coupon bond Coupon interest rates are determined as a percentage of the bond's par value, also by the relationship between the coupon rate and the current price.