Zero Coupon Bonds Valuation and Formula

On this page we define a Zero coupon bond and provide a formula for valuation of such bonds along with an example calculation to find valuation of zero coupon bonds.

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How do you define a zero coupon bond

Zero Coupon Bond makes no periodic interest payment but instead is sold at a steep discount from its face value. The valuation equation for zero coupon bond is a truncated version of that used for a normal interest paying bond. The present value of interest payments component is looped off, and we are left with value being determined solely by the present value of the principal payment at maturity

What is the formula for Valuation of zero coupon bond?

Zero Coupon Bond Valuation Formula

V=MV(PVIF_kd,n)

Calculation of Valuation of zero coupon bond

Suppose that Tequilla Corp. issues a zero coupon bond having a 12 year maturity and a $1,000 face value, If your required rate of return is 11%, then

Zero Coupon Bond Valuation Example

V=$1,000(PVIF_11%,12)

V=$1000(0.286)

V=$286

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