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Zero coupon bonds

These bonds do not have explicit rate of interest on their face rather they provide a lump sum amount at a future date in exchange for the current price of the bond. It follows then that the return of these bonds is the difference between the face value and the purchase price. This return is also called yield to maturity (Thau, 2000). The face value of these bonds is calculated using the market yield which is the market interest rate. Zero coupon bonds involve one single payment which is usually the face value at maturity. If his amount (face value) is the discounted, the bond value is achieved. Value of zero coupon bond=present value of amount on maturity Vb=par value…