How to Calculate the Price of a Zero Coupon Bond

by Louise Balle, Demand Media

    A bond is a loan investors give to a government entity or company, also called the bond issuer. In some cases, the bond issuer makes regular interest payments to the holder (you), but with a zero coupon bond the issuer doesn't make interest payments during the term of the bond. You just receive the final value at the date of maturity. Calculating the price of the zero coupon bond is fairly simple — all you have to do is fill values into a basic formula.

    Step 1

    Identify the conditions of the bond you wish to purchase. That includes the value at maturity, the annual yield you want (interest profit on the bond expressed as a percentage), and the number of years that will transpire before maturity. For the purpose of an example, say the value at maturity is $10,500, the annual yield you desire is 9 percent, and it will take 10 years to mature in value.

    Step 2

    Insert your terms in the bond price formula, which is P = M / (1+y) ^ n. M is the value at maturity, "y" is the yield divided by two, and "n" is the length of the bond in years times two. So in this example M is 10,500, "y" is 4.5 percent or .045 (9 percent divided by two) and "n" is 20 (10 years times two) .

    Step 3

    Calculate your bond price based on your terms. In this example the result ("P" or price of the bond) equals 10500/(1+.045)^20 or $4,353.75.

    Tip

    • If you'd rather not do the calculation by hand, some online calculators allow you to determine the bond price.

    About the Author

    Louise Balle has been writing Web articles since 2004, covering everything from business promotion to topics on beauty. Her work can be found on various websites. She has a small-business background and experience as a layout and graphics designer for Web and book projects.