Zero Coupon

For a zero coupon bond the only cash flow is the par value at maturity.
There are no periodic coupon payments.
The yield of a zero coupon bond can be calculated using the following formula


r = (par value / price ) (1/n) - 1


Remember that the number of periods used in the formula is double the number of years
Doubling this value will give you the yield to maturity.


Example

What is the yield of a zero coupon bond that matures in 15 years.
The par value is £1,000 and the bond is selling for £274.78


r = (1000 / 274.78)(1/30) - 1
r = (3.639275)0.0333333 - 1
r = 0.044 = 4.4%


Doublying gives yield to maturity = 8.8%



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