A zero coupon bond with a face value of $1,000 is issued with an initial price...

A zero coupon bond with a face value of $1,000 is issued with an initial price of $497.96. The bond matures in 16 years. What is the implicit interest earned, in dollars, for the first year of the bond's life?

Multiple Choice:

$12.98

$22.18

$11.60 X

$11.09

$6.49

Solutions

Expert Solution

Information provided:

Face value= future value= $1,000

Initial price= present value= $497.96

Time= 16 years

The question is solved by first calculating the interest rate.

Enter the below in a financial calculator to compute the interest rate:

FV= 1,000

PV= -497.96

N= 16

Press the CPT key and I/Y to compute the interest rate.

The value obtained is 4.4541.

The annual interest rate is 4.4541%.

Implicit interest for the first year of bond’s life = 4.4541%/ 100*$497.96

= $22.1795 $22.18.

Hence, the answer is option b.

In case of any query, kindly comment on the solution.

jeff jeffy answered 5 months ago

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