Question

An investor purchases a 2-year zero-coupon bond with par value of $1,000 at $960. The implied interest earned on the bond is closest to:

A) $0

B) $20

C) $40

D) None of the above. Interest should always be denoted in % not dollars,

E) Unable to calculate because the discount rate is missing

Answer 1

A zero-coupon bond does not come with periodic interest payments like other bonds. Instead, it is issued at a discount and redeemed at par. The discount at which it is issued is the implied interest on the bond. In other words, the difference between the par value and the issue price is the implied interest on the bond.

In the given problem, we can see;

Par value = $1,000
Issue price / purchase price = $960

Therefore, the implied interest = $1,000 - $960 = $40.

Option "C) $40" is the correct answer.