Valuing zero-coupon bonds is crucial for investors seeking a secure return on their investment. A zero-coupon bond is a debt security that pays no periodic interest payments (coupons), but instead is sold at a discount to its maturity value, offering a lump sum return at the maturity date.
Understanding the calculation of zero-coupon bond values is essential for effective portfolio management. Zero-coupon bonds provide a guaranteed return and are particularly attractive during periods of low interest rates. The development of these bonds in the 1980s revolutionized the fixed-income market.