Question

Suppose you purchase a zero coupon bond with a face value of $1,000, maturing in 19 years, for $215.75. Zero coupon bonds pay the face value on the maturity date.Whatis the implicit interest in the first year of the bond's life?

Answer 1

Future value = present value*(1+r)^n

r = interest rate

n = number of periods

1000 = 215.75*(1+r)^19

(1-r)^19 = 1000 / 215.75

r = (4.635)^(1/19)

r = 8.41%

So implicit interest in first year = 215.75 * 8.41% = $18.14