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.
A new Zerobond is issued at the following conditions:
Lifespan: 10 years
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)
1000 ^ (1/10) -1 = 2.92%
Characteristics of a Zerobond
(Click on the picture to enlarge)