Calculating zero-coupon bonds in Excel is a critical skill for financial professionals. Zero-coupon bonds are bonds that do not pay periodic interest payments, instead paying all interest (in the form of a lump sum) at maturity. This makes them attractive to investors who are looking for a fixed rate of return over a specific period of time, and to issuers who are looking to raise capital without having to pay periodic interest payments.
Zero-coupon bonds are typically purchased at a discount to their face value, and the difference between the purchase price and the face value represents the return to the investor. The yield-to-maturity (YTM) of a zero-coupon bond is the annualized rate of return that the investor will receive if they hold the bond until maturity.