A 16-year,$1,000 face value,zero coupon bond has a yield to maturity of 8%.What is the amount of tax an investor in the 33% tax bracket will pay the first year of the bond? Do not round your intermediate calculations.

Question

Quizplus · Accepted Answer

The price of the bond can be calculated as follows:
P = F / (1 + y)^n = 1000 / (1 + 0.08)^16 = $345.63
The annual interest income is $1,000 - $345.63 = $654.37
Assuming a tax bracket of 33%, the tax the investor will pay on the interest income in the first year is:
$654.37 x 0.33 = $215.80
Dividing this by the face value of the bond gives:
$215.80 / $1,000 = 0.2158
Multiplying by 100 gives the answer in percentage form:
21.58%
Rounding to two decimal places gives the answer:
7.71% 
Therefore, the best choice is (C).

A 16-Year,$1,000 Face Value,zero Coupon Bond Has a Yield to Maturity