Rates, Yields, Bond Math 17

103%
Premium Bond
102%

102%

101%

101%
Par Bond
100%

100%

99%

99%

Discount 98%
Bond
98%
2 1.5 1 0.5 0
Years to Maturity

FIGURE 2.3 Pull to par effect for a 2-year, 4% semiannual coupon bond.

2.3.2 Zero-Coupon Bond

If the coupon rate is zero, C = 0, then the only cash flow is the principal
repayment at maturity versus the amount paid for it, and the bond is aptly
called a zero-coupon bond. Since for one unit of face value, its only future
cash flow is unit payment at maturity, its price is simply the discount factor

1
PZ (y, N, m) = D(T) = (2.8)
(1 + y∕m)N−w

2.3.3 Annuity
An annuity is a financial product that pays a series of regular cash flows to
the owner and variants of it are widely offered by insurance companies as
retirement and estate planning products. For example, a $1,000,000 5-year
annuity with monthly payments of 3% per annum pays

3%
$1,000, 000 × = $2,500
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