A zero coupon bond with a nominal $1,000 face value has 20 years to maturity and is issued with a price of $311.80.What is the implicit interest you earn on the bond in year 2 of the bond's life,keeping all other factors constant?

Question

Quizplus · Accepted Answer

The implicit interest in year 2 is calculated by finding the difference between the bond's value at the end of year 2 and the end of year 1. The bond's value grows at a constant rate, which can be found using the formula for compound interest. The interest rate is approximately 5.5%, and the bond's value at the end of year 2 minus the value at the end of year 1 gives the implicit interest of $18.71.

A Zero Coupon Bond with a Nominal $1,000 Face Value