What are Zerobonds?

Definition: Zerobond is a bond which pays no interest in form of a coupon. Instead the investor gets a yield in form of a discount on the nominal value. The Zerobond is issued below nominal value and payed back at maturity at 100% of nominal. They are also known as discount-bond or deep-discount-bond.

 

Example Zerobond

A new Zerobond is issued at the following conditions:

Lifespan: 10 years

Interest: 0%

Nominal Value: 1.000.-

Issue Price: 750.-

 

Yield of a Zerobond

This Zerobond pays no coupon but is issued at 750 and payed back at 1000. This is a direct yield of 33% in 10 years. But whats the yearly yield to maturity an investor gets?

 

 Nominal-Value      ^ (1/Lifespan)
  Issue-Price

=

  1000      ^ (1/10)   -1 =  2.92%
   750

 

Characteristics of a Zerobond

(Click on the picture to enlarge)

zerobond