How do you calculate value of a zero coupon bond?

The value of a zero-coupon bond is calculated using the present value formula since it does not pay periodic interest. The formula is:

$$\text{Value of Zero-Coupon Bond}=\frac{\text{Face Value}}{(1+r{)}^n}$$

Where:

• Face Value (FV) = The bond’s maturity value (paid at maturity).
• $r$ = The market interest rate per period (expressed as a decimal).
• $n$ = The number of periods until maturity.

Example Calculation

Suppose a zero-coupon bond has:

• Face Value (FV) = Rs. 1,000
• Market Interest Rate ($r$) = 8% per annum
• Time to Maturity ($n$) = 5 years

$$\text{Value}=\frac{1000}{(1+0.08{)}^5}=\frac{1000}{1.4693}=\text{Rs. 680.58}$$

Thus, the bond’s current value is Rs. 680.58.