Question

A newly issued 20-year maturity, zero-coupon bond is issued with a yield to maturity of 8% and face value $1,000. Find the imputed interest income in the first, second, and last year of the bond's life. Assume annual compounding. (Round your answers to 2 decimal places. Omit the "$" sign in your response.) Imputed Interest First year Second year Last year

Answer 1

Imputed Interest income in this case can be referred to where the investor does not receive any fixed annual interest payments but the bond itself has been purchased at a discount to the face value. The difference between the discounted price and the maturity value represents the interest the investor has earned during the tenure of the bond.

Here the principal for each year is computed through Excel we can normally compute it through the compound interest formula but consider compunding annually.

to no Yoild to maturity = 8%, face value - 1000 compounding annually In the First year = P[CHM- s looo [C1+8%) = 80 for the second year = 70 1080 [C1+8%)-1] = 166.40 I (By computing in exce) . For the last year = 4,315.70 [C1+8%)]] = 345.26 XO Year Interest First year I 80 166.40 I Last year 345.26 Scanned with di CamScanner