For a zero coupon bond the only cash flow is the par value at maturity.
There are no periodic coupon payments.
The price of a zero coupon bond can be calculated using the following formula:
bond price = F / (1 + r)n
What is the price of a zero coupon bond that matures in 10 years.
The par value is £1,000 and the yield is 8.6%
1) Calculate the number of periods
To make this consistent with the equation for coupon paying bonds the number of periods will be (10 * 2) = 20
2) Calculate the semi-annual interest rate
the semi annual interest rate will be 8.6/2 = 4.3
bond price = 1000 / (1 + 0.043)20
bond price = 1000 / (1.043)20
bond price = (1000 * 0.43083)
bond price = £430.83
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