GUS, Inc. wants to issue zero-coupon bonds with a face value of $1,000 and a term to maturity of 4 years. |
Requirement 1: |
What is the current price of this bond to an investor with a required yield to maturity of 8 percent? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) |
Current bond price | $ |
Requirement 2: |
Assume the investor purchases the bond at the price you determined in Requirement 1 above. How much would the investor have to report as interest in Year 2 for tax purposes? |
Interest in Year 2 | $ |
Ans)
Given: Zero coupon bond
Face value = $1,000
Time to maturity = 4years
Required yield to maturity = 8%
1) Present value of bond:
PV = FV/(1+interest rate)^No of periods
PV = $1,000/(1+8%)^4
= $735.0298528
Current bond price = $735.03
2) Interest in year 2:
Price of bond after one year = $735.0298528 * (1+8%)
= $793.832241
Accrued Interest in year 2 = $793.832241 * 8%
= $63.50657
Interest in year 2 = $63.51
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