1. What is Zero Coupon Bond YTM?

The Yield to Maturity (YTM) of a zero-coupon bond is the annualized rate of return earned on a bond that is held until maturity. Unlike coupon bonds, zero-coupon bonds don't make periodic interest payments.

2. How Does the Calculator Work?

The calculator uses the zero-coupon bond YTM formula:

Where:

• \( Par \) — Face value of the bond at maturity (USD)
• \( Price \) — Current market price of the bond (USD)
• \( n \) — Years to maturity

Explanation: The formula calculates the compound annual growth rate that equates the bond's current price to its par value at maturity.

3. Importance of YTM Calculation

Details: YTM is crucial for comparing different fixed-income investments and understanding the true return of a bond investment, accounting for time value of money.

4. Using the Calculator

Tips: Enter the bond's par value, current price, and years to maturity. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between YTM and current yield?
A: Current yield only considers annual coupon payments relative to price, while YTM accounts for all cash flows including the final principal payment.

Q2: Why is YTM important for zero-coupon bonds?
A: Since zero-coupon bonds don't pay periodic interest, YTM represents the total return from price appreciation alone.

Q3: How does YTM relate to bond prices?
A: YTM and bond prices have an inverse relationship - when YTM rises, bond prices fall, and vice versa.

Q4: What assumptions does YTM make?
A: YTM assumes the bond is held to maturity and all payments can be reinvested at the same rate.

Q5: How does maturity affect YTM?
A: Generally, longer maturities result in higher YTM for the same price difference, as the return is spread over more years.