Suppose you purchase a zero coupon bond with a face value of $1,000, maturing in 18...

Suppose you purchase a zero coupon bond with a face value of $1,000, maturing in 18 years, for $214.70. Zero coupon bonds pay the investor the face value on the maturity date. What is the implicit interest in the first year of the bond’s life?

Expert Solution

Face Value = F = 1000

Maturity = T = 18 years

Current Value = PV = 214.70

Current Value of Zero Coupon Bonds is given by following formula -

Where,
PV = Current Value of the zero Coupon Bond
F = Face Value of the zero coupon Bond
R = current Yield to Maturity = Currently applicable interest rate
T = Time to maturity

Hence,

R = 0.089232

R = 8.9232%

Answer: Implicit interest rate in the first year = 8.9232%

jeff jeffy answered 2 years ago

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Suppose you purchase a zero coupon bond with a face value of $1,000, maturing in 18...

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