Total return on zero coupon bond

Popular Courses. Login Newsletters. Bonds Fixed Income Essentials. What is a Zero-Coupon Bond A zero-coupon bond is a debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value. A zero-coupon bond is also known as an accrual bond. Key Takeaways A zero-coupon bond is a debt security instrument that does not pay interest. Zero-coupon bonds trade at deep discounts, offering full face value par profits at maturity.

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The difference between the purchase price of a zero-coupon bond and the par value, indicates the investor's return. The price of a zero coupon bond can be calculated as:. Compare Investment Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Bond valuation is a technique for determining the theoretical fair value of a particular bond. Constant Yield Method The constant yield method is one way of calculating the accrued discount of bonds that trade in the secondary market.

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What is a Trading Discount In finance, a discount refers to a situation when a bond is trading for lower than its par or face value. These include pure discount instruments. Factors that Create Discount Bonds A discount bond is one that issues for less than its par—or face—value, or a bond that trades for less than its face value in the secondary market. Just as with buying any other discounted products there is risk involved for the investor, but there are also some rewards. The U. Maturity: Describes the portfolio of the fund in terms of the different maturities of the securities it holds.

Weighted average life to maturity WALM is a measure of the sensitivity of a fixed income portfolio to interest rate changes. WALM is the average time in years to receive the principal repayments. Accordingly, WALM reflects how a portfolio would react to deteriorating credit or tightening liquidity conditions. Data reflects past performance for Investor Class shares, assumes reinvestment of dividends and capital gains and is no guarantee of future results.

Current performance may be higher or lower than data shown. Investment return and principal value fluctuates. Redemption value may be more or less than original cost. Obtain performance data current to the most recent quarter end. For additional share class information, consult the prospectus. Treasury securities and their equivalents, which can be subject to dramatic price fluctuations and could result in significant gains or losses if sold prior to maturity.

Each Zero Coupon fund invests in different maturities of these debt securities and has different interest rate risks. The fund can only offer a relatively predictable return if held to maturity. Investment in zero-coupon securities is subject to greater price risk than interest-paying securities of similar maturity. Although you can potentially earn a dependable return if you hold your shares to maturity, you should be prepared for dramatic price fluctuations which may result in significant gains or losses if sold prior to maturity.

Net expense ratio is the total annual operating expense ratio for the fund, net of any fee waivers or expense reimbursements. Gross expense ratio is the total annual operating expense ratio for the fund, gross of any fee waivers or expense reimbursements.

Calculating Returns

Expense ratios are as of the funds' most current prospectus. This is the actual ratio that investors paid during the fund's most recent fiscal year. W2 If your account falls below the minimum balance, you will be notified and given 90 days to meet the minimum. If the deadline is not met, American Century Investments may redeem the shares in the account and send the proceeds to the address of record. Lipper rankings are based on average annual total returns. All rights reserved. Any copying, republication or redistribution of Lipper content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Lipper.

Lipper shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon. To make the comparison, consider newly issued bonds by the same issuer and with the same time until maturity. The bond matures in 10 years. Interest rates increase. The loss reduces the total return on the bond. Trade a bond at a premium. A premium means that the price of the bond is more than the face amount. Interest rates decrease.

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  • The gain increases the total return on the bond. You may incur a gain or loss by buying a bond and selling it before the maturity date.

    Formula - Yield on a Zero-Coupon Bond

    An investor may also buy a bond at a premium or discount and hold the bond until maturity. In each case, you may have a gain or a loss. Add up your total proceeds from the bond. You can calculate your total return by adding the interest earned on the bond to the gain or loss your incur. The gain or loss may be generated based on selling the bond, or simply holding the bond until maturity.

    There is no gain or loss on the bond. Say that you buy the same bond and own the security for the same length of time. Assume that you buy the same bond and own the security for the same length of time. Adjust your bond's total return for the impact of taxes.

    Zero Coupon Bond Valuation using Excel

    Your interest income and any capital gain or loss will be taxed. You should consider the dollar amount of your payments after taxes are paid. Interest income is taxed as ordinary income. The tax rate for interest income is the same rate that you pay on your wages. Keep in mind that the tax rates for interest income and capital gains or losses may be different. It is important to note that you can declare capital losses as deductibles on your tax return. You can use your capital losses from investments to reduce your capital gains.

    This reduces how much you have to pay in taxes. Calculate the impact of the market interest rate on the price of the bond. The selling price of a bond varies depending on the current interest rate in the market. If the current market interest rate goes higher than the bond's coupon rate, then the bond is sold at a discount. Conversely, if the market interest rate falls below the bond's coupon rate, then the bond is sold at a premium.

    Zero Coupon Bond

    So the company discounts the price of the bond to compensate you for the difference in the interest rate. Conversely, suppose the current market interest rate is 8 percent. In that case, the 10 percent coupon rate of the bond is a better return than you could get elsewhere.