U.S. citizens must pay tax on the imputed interest represented by the fact that zero coupon bonds price gets a bit closer to par value as each year goes by. If you have a 25-year zero coupon bond with $1,000 par value, how much imputed interest will you record in the coming year if interest rates stay the same at ten percent?

Question

Quizplus · Accepted Answer

The imputed interest for the coming year is calculated as (par value - current price)/par value. Since the bond has a 25-year maturity, it will be priced at approximately $1,000/(1+0.10)^25 = $28.09 today. Therefore, the imputed interest for the coming year is ($1,000-$28.09)/$1,000 x 0.10 = $9.23. So, the correct choice is B.

US Citizens Must Pay Tax on the Imputed Interest Represented