When calculating a Zero-coupon bond should the payments per year be set to 1? Instead of 2 for normal coupon bonds?

12/3/2007 7:18:14 PM

no

12/3/2007 9:08:29 PM

no, since zero coupon bonds do not pay interest. they pay out the full face value upon maturity. When a zero coupon bond matures, the investor will receive one lump sum equal to the initial investment plus interest that has accrued.

12/3/2007 10:32:24 PM

Yes, on the TI-86 financial stuff, you'd set the P/Y to 1 for bonds that have no coupon payment.

and according to my notes, you can check this by

FV=PV(1+rate)^n

12/3/2007 10:39:10 PM

^is the interest not still compounded twice a year even though it's not paid out until maturity?

12/3/2007 11:42:22 PM

The normal convention to use for most zero-coupon bonds is 2 semi-annual coupon payments, unless otherwise noted.

^^^Just to be clear, zero-coupon bonds pay the full face value only, but sell at a discount to par value. These are sometimes known as "pure discount securities" because there is no explicit interest. However, the discount to par is based on the interest rate/compounding periods.

Depending on the characteristics of the bond in question, using the wrong number of compounding periods will result in potentially large, but possibly small differences.

12/4/2007 1:16:59 AM

I'm pretty sure you set the payments to one per year on either calculator.

12/4/2007 8:58:35 PM

^^thanks. it's been awhile since I've looked at zero coupon bonds.

12/4/2007 9:40:43 PM