Question

The firm issues a $5 million zero coupon with a maturity of 4 years when the...

The firm issues a $5 million zero coupon with a maturity of 4 years when the market rates are 8%. Assuming semiannual compounding periods, the total interest on the bond is: Select one: a. $1,200,000 b. $1,346,549 c. $1,200,411 d. $1,600,000

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Answer #1
Price of the zero coupon bond can be computed using financial calculator
put in calculator
FV 5000000
PMT 0
I 8%/2 4%
N 8
compute PV ($3,653,451.03)
a Price today =              3,653,451
b Future value =              5,000,000
c=b-a Interest amount =              1,346,549
Answer is option B)              1,346,549
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