Question

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

$

Answer 1

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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