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BOND MATH: The Theory Behind the Formulas by Donald J. Smith

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Yields to Maturity on Zero-Coupon Bonds

After dealing with money market interest rate calculations in Chapter 1, zero-coupon bond yields are a welcome relief and a return to classic time-value-of-money theory. A pricing formula for zeros is shown in equation 2.1,

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where PV = present value, or price, of the bond, FV = future value, which usually is 100 (percent of par value) at maturity, Years = number of years to maturity, PER = periodicity—the number of periods in the year; and APRPER = yield to maturity, stated as an annual percentage rate corresponding to PER.

We can now use equation 2.1 to illustrate the yield calculations for the two TIGRS. ...

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