Question

A newly issued 20-year maturity, zero-coupon bond is issued with a yield to maturity of 7.0% and face value $1,000. Find the imputed interest income in the last year of the bond’s life. Assume annual coupon payments. a. $13.56 b. $36.81 C. $0 d. $65.42 e. $73.44

Answer #1

Face Value of Zero-Coupon Bond = $1000

its Yield to Maturity(YTM) = 7%

As we have to compute Imputed Interest Income in the last year of Bond's life, first we will Calculate the Price of Zero-coupon Bond in the last year.

Since, it is a last year only 1 year is left for maturity

Price of Zero-coupon bond = Face Value/(1+YTM)^1

Price of Zero-coupon bond = $1000/(1+0.07)^1

Price of Zero-coupon bond in the last year= $934.58

- Imputed Interest Income in the last year of Bond's life = Price of Zero-coupon bond in the last year*YTM

= $934.58*7%

**Imputed Interest Income in the last year of Bond's life
= $65.42**

**Option D**

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