📖 The story
A company issues a zero-coupon bond with an 8-year term that is redeemed at 100. For investors to earn 5 % return, the issue price has to be determined.
ℹ Single annual compounding, redemption at 100.
Topics › Bonds & Zero-Coupon Bonds › Issue price of a zero-coupon bond
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Bonds & Zero-Coupon Bonds
Issue price of a zero-coupon bond
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What you learn
With a zero-coupon bond there is no interest payment – the return lies entirely in the discount: the higher the yield demanded, the lower the issue price below 100.
In short: The zero-coupon bond is issued at the discounted redemption value – the higher the yield, the lower the price.
Formula
Price = 100 / (1 + i)^n
With the example numbers
Kurs = 100 / (1 + 0.0500)8 = 67.68
How to read the formula
Price = 100/(1+i)ⁿ is pure discounting of the redemption value. Since a zero-coupon bond pays no ongoing interest, the entire return lies in the discount of the purchase price below 100 – if the market rate rises, the price falls.
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