Zero Coupon Bond Calculator: 5 Things You Should Know!
1. A zero coupon bond calculator can help you determine the actual price of this type of bond. These bonds do not receive periodic interest payments and instead are sold at a discount from the face value. You will need to enter the duration of zero coupon bond into the calculator as well as the interest rate offered annually. The face value of the bond also needs to be entered so that the calculator can determine the present value or price that the bond has. The discounted price is the attraction of these bonds and the calculator will help you determine just how much of a discount you will receive.
2. Every zero coupon bond calculator is not the same, and some of these tools are more trusted than others. Some investors will use the formula and forgo a calculator completely but the chance of making a mathematical error is a risk. The
zero coupon bond rates offered are usually competitive with the rates that other bonds offer but the tax advantages are better. The calculator can tell you what you will pay for the bond but this tool can not identify the level of risk involved. Only thorough research and comparisons will identify the bond risk level.
3. A calculator will help you determine the cost for zero coupon municipal bonds but this tool can not help you choose the best municipal entity to invest in. Many investors choose municipals because these are generally considered safer than the corporate options, but a calculator will give the same price for both types as long as the interest rates and maturity lengths are the same. The calculator will not differentiate between the best and worst credit quality bonds, and is only used to calculate price. The calculator is just one of many tools needed to evaluate a possible bond choice.
4. Every zero coupon bond calculator uses the same formula to determine the discounted price of the bond. This formula is: face value of bond/ (1 + rate) time to maturity = value of the zero coupon bond. The face value of the bond is divided by the sum of the rate plus one multiplied by the time until the bond matures. This formula takes into account the duration of the bond so that the price for a 5 year security is the just as accurate as the price of a 20 year security.
5. A zero coupon bond calculator does not take into account the tax advantages that these bonds may offer. Because the zero does not offer periodic interest payments the same way that coupon bonds do there are no capital gains due during the duration of the bond. Instead the taxes on any gains are owed when the bond matures and is redeemed for face value. The tax advantages can be a big benefit for some investors and should be calculated into the bond research and comparisons. There are a number of factors that the calculator will not consider and these need to be evaluated as well as the final present value of the bond before making any final investment decisions.