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?

Solutions

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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