Skillsfirst Level 5 Diploma in Financial Trading (RQF) - Module 1 - Trading Introduction
Skillsfirst Level 5 Diploma in Financial Trading (RQF) - Module 2 - Financial Products
Skillsfirst Level 5 Diploma in Financial Trading (RQF) - Module 3 - Economic Principles
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ZERO-COUPON BONDS

Zero-coupon bonds are pretty self explanatory, it is a bond that is offered with no coupon payments, and due to this the calculation is different because you simply calculate the present value of the par value at maturity.

For example a zero coupon bond with a 5 year maturity, par value of $1000, and required yield of 6%.

  • Determine the number of periods – The required yield on most zero-coupon bonds is semi annual unless indicated otherwise. Interest is equal to the difference between purchase price and maturity value, but we need a way to compare this with a coupon bond, so adjust the 6% required yield equivalent of its semi-annual coupon rate. The number of periods for this bond will be doubled, giving us 10 periods over 5 years.
  • Determining the yield – Required yield of 6% must also be divided by 2 because the number of periods has doubled. So the yield will be 3%

The Formula will then look like this:

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