Zero Coupon Bonds

Zero coupon bond is a type of  bond which do not make the period coupon payments. This  bond is sold at a discount, that is, it can be bought at a price lower than its face value with face value to be paid at the time of maturity. Examples of zero-coupon bonds include U.S. savings bonds, U.S. Treasury bills, long-term zero-coupon bonds etc.

Price of a zero coupon bond can be calculated by using the below formula:

where, P= Price of the zero coupon bond

M = Maturity Value

r = Investor's required annual yield

n = Number of years until maturity