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Monthly Compounding Formula:
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A zero-coupon bond is a debt security that doesn't pay periodic interest but is issued at a discount to its face value. The bond's return comes from the difference between its purchase price and the face value received at maturity.
The calculator uses the monthly compounding formula:
Where:
Explanation: The formula accounts for monthly compounding by dividing the annual rate by 12 and multiplying the time period by 12.
Details: Calculating the face value helps investors understand the future value of their investment and compare different bond options. It's essential for financial planning and investment analysis.
Tips: Enter the bond's purchase price (PV), annual interest rate (as percentage), and time to maturity in years. All values must be positive numbers.
Q1: What's the difference between annual and monthly compounding?
A: Monthly compounding calculates interest each month, leading to slightly higher returns than annual compounding due to the compounding effect.
Q2: How does this differ from regular bond calculations?
A: Zero-coupon bonds don't make periodic interest payments, so their entire return comes from the difference between purchase price and face value.
Q3: Are zero-coupon bonds taxed differently?
A: Yes, in many jurisdictions, the imputed interest is taxable annually even though no cash payment is received (phantom income).
Q4: What happens if interest rates change after purchase?
A: The market value of the bond will fluctuate with interest rate changes, but the face value at maturity remains the same.
Q5: Can this calculator be used for other investments?
A: While designed for zero-coupon bonds, it can calculate any investment with a fixed rate and monthly compounding.