Question

A zero coupon bond with a face value of $1,000 is issued with an initial price of $415.50. The bond matures in 10 years. What is the implicit interest, in dollars, for the first year of the bond's life

Answer 1

Answer:

$38.14

Explanation:

The yield to maturity on the bond can be computed using the rate formula in excel as shown below:

=rate(nper,pmt,-pv,fv)

nper is the bond life measured in years which is 10

pmt is the annual coupon payment since the bond zero coupon ,pmt is $0

pv is current price of the bond which is $415.50

fv is the face value of the bond i.e $1000

=rate(10,0,-415.50,1000)=9.18%

implicit interest in dollars for first year=cash proceeds*yield to maturity

cash proceeds which is the same as price of bond is $415.50

implicit interest in dollars=$415.50*9.8%=$38.14