Question

What is the yield on a 10-year zero-coupon bond with a par value of $1,000 if it is purchased for $490?

Answer 1

3.11% is the yield on a 10-year zero-coupon bond with a par value of $1,000 if it is purchased for $490.

What is zero-coupon bond?

Bonds with zero coupons do not accrue interest during their entire lifespan. Rather, buyers of zero coupon bonds pay a significant discount over the bond's face value, which is the sum they will be paid when the bond "matures" or becomes due.

Bonds with no coupon typically have lengthy maturity dates; many take ten, fifteen, or even more years to reach their final maturity. These lengthy maturity dates enable a shareholder to budget for a long-term objective, like paying for a child's college tuition. A small amount of money that will grow over many years can be put up by an investor with the deep discount.

Zero coupon bonds of various types, issued by a variety of issuers, are available for purchase by investors in the secondary markets.

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