Question

Suppose you purchase a zero coupon bond with a face value of ​$1,000​, maturing in 18years, for ​$214.10. Zero coupon bonds pay the investor the face value on the maturity date. What is the implicit interest in the first year of the​ bond's life?

Answer 1

IRR is the Rate at which PV of Cash inflows are equal to PV of Cash Outflows

Year	CF	PVF @8%	Disc CF	PVF @9%	Disc CF
0	$ -214.10	1.0000	$ -214.10	1.0000	$ -214.10
18	$ 1,000.00	0.2502	$ 250.25	0.2120	$ 211.99
NPV	$    36.15		$     -2.11

IRR = rate at which least +ve NPV + [ NPV at that Rate / Change in NPV due to 1% inc in Rate ] * 1%

= 8% + [ 36.15 / 38.26 ] * 1%

= 8% + [ 0.94 * 1% ]

= 8% + 0.94%

= 8.94%