Question
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A newly issued 20-year maturity, zero-coupon bond is issued with a yield to maturity of 9.5%...
A newly issued 20-year maturity, zero-coupon bond is issued with a yield to maturity of 9.5% and face value $1,000. Find the imputed interest income in: (a) the first year; (b) the second year; and (c) the last year of the bond’s life. (Round your answers to 2 decimal places.)
Solutions
Expert Solution
| Interest | |
| Year -1 | $ 15.47 |
| Year-2 | $ 16.94 |
| Year-20 | $ 86.76 |
Working:
| Step-1:Price of bond today | ||||||||
| Price of bond | =-pv(rate,nper,pmt,fv) | |||||||
| = $ 162.82 | ||||||||
| Where, | ||||||||
| rate | = | 9.50% | ||||||
| nper | = | 20 | ||||||
| pmt | = | 0 | ||||||
| fv | = | $ 1,000.00 | ||||||
| Step-2;Price at the end of 19 years | ||||||||
| Price of bond | =-pv(rate,nper,pmt,fv) | |||||||
| = $ 913.24 | ||||||||
| Where, | ||||||||
| rate | = | 9.50% | ||||||
| nper | = | 1 | ||||||
| pmt | = | 0 | ||||||
| fv | = | $ 1,000.00 | ||||||
| Step-3:Calculation of Interest | ||||||||
| Year | Price at the beginning | Rate of Interest | Interest | Price at the end | ||||
| a | b | c=a*b | d=a+c | |||||
| 1 | $ 162.82 | 9.5% | $ 15.47 | $ 178.29 | ||||
| 2 | $ 178.29 | 9.5% | $ 16.94 | $ 195.23 | ||||
| 19 | $ 913.24 | 9.5% | $ 86.76 | $ 1,000.00 |
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