F = Bond Face Value, r = Rate, n = Years to Maturity. formula for bond equivalent yield is primarily used to compare discount bonds of short maturity, specifically less than one of periods till maturity; Calculation of the Coupon Bond (Step by Step) The formula for coupon bond calculation can … Zero-Coupon bond also known as an accrual bond, and the word coupon represents interest. Zero coupon bond value = F ÷ (1+ r)t. F = face value of bond. In the above example, the stated interest rate was an annual one, and the number of time periods until maturity was measured in years. On the other side thebond equivalent yield formula does not consider the compounding effect anddirectly calculates the rate of return for the period. or her own discretion, as no warranty is provided. Zero coupon bond effective yield formula takes in to accountthe compounding effect while calculating the rate of return. For this reason, the *The content of this site is not intended to be financial advice. Years to Maturity - The numbers of years until bond maturity. Include your email address to get a message when this question is answered. This means that the present value of a zero coupon bond providing a 6% rate of return by paying out $1,000 at maturity is $747.26. This is the way zero coupon bond effective yield can be very helpfulfor making decisions when you have multiple options available for decisionmaking. Let’s suppose an example where an individual buys zero coupon bonds for $700 having a face value of $1,700 on maturity. Zero Coupon Bond Effective Yield = [F ÷ PV](1 ÷ n) – [ 1 ], F = face valuePV = present valuen = number of periods. face value. 5 9 3 7 4 2 4 6 0 1 = $ 3 8 5. For example, if the bond issuer will pay the bond holder the face value of the bond in five years, then the time-to-maturity is five. % of people told us that this article helped them. If you really can’t stand to see another ad again, then please consider supporting our work with a contribution to wikiHow. and similar publications. Zero coupon bond is also known as pure discountbond or sometimes also as discount bond. Face Value. If you are looking for an advise about trading, investing, or any other financial decision you must consult a professional. By using our site, you agree to our. For instance if adiscount bond have a maturity time of 7 years and we need to take in to accountthe compounding effect along with time value of money concept. Lastly, divide the face value of $2,000 by 1.1236 to find that the price to pay for the zero-coupon bond is $1,880. The return for such aninvestment would be; So the return of the investment will be 160% after 7 yearswhile on the other side the discount bond gives 145% at the end of maturityperiod. No dividends are available during the investment tenure and profits are only available by selling these bonds. Zero Coupon Bond Value = F / (1 + r/100)^n, where. Risks can include the potential for default (the bond issuer being unable to pay back the bond holder) or the risk of a future increase in the interest rate of new bonds, which will decrease the attractiveness (relative value) of the present bond. C = Periodic coupon payment, P = Par value of bond, YTM = Yield to maturity; n = No. First, divide 6 percent by 100 to get 0.06. To understand the compounding effect with zero coupon bondeffective yield let’s consider an example for understanding. {"smallUrl":"https:\/\/www.wikihow.com\/images\/thumb\/d\/d5\/Calculate-a-Zero-Coupon-Bond-Step-1.jpg\/v4-460px-Calculate-a-Zero-Coupon-Bond-Step-1.jpg","bigUrl":"\/images\/thumb\/d\/d5\/Calculate-a-Zero-Coupon-Bond-Step-1.jpg\/aid1442756-v4-728px-Calculate-a-Zero-Coupon-Bond-Step-1.jpg","smallWidth":460,"smallHeight":345,"bigWidth":"728","bigHeight":"546","licensing":"