You buy a zero coupon bond at the beginning of the year that has a face value of

Question

You buy a zero coupon bond at the beginning of the year that has a face value of $1,000, a YTM of 9 percent, and 21 years to maturity. You hold the bond for the entire year. Assume semiannual compounding.

How much interest income will you have to declare on your tax return? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

You buy a zero coupon bond at the beginning of the year that has a face value of $1,000, a YTM of 9 percent, and 21 years to maturity. You hold the bond for the entire year. Assume semiannual compounding.

Explanation / Answer

Current price of the bond:

Fv= 1000

R= 9%/2 = 4.50%

N= 21 x 2 =42

PV= Fv/ (1+r)n

     = 1000/ (1+0.045)^42

      = 157.44

Total interest earned = 1000-157.44

                                                = 842.56

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