Vogril Company issued 20-year, zero coupon bonds with an expected yield to maturity of 9 percent.The bonds have a par value of $1,000 and were sold for $178.43 each.What is the expected interest expense on these bonds for Year 8?

Question

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The interest expense for a zero-coupon bond is calculated using the bond's yield to maturity. For Year 8, the interest expense is calculated as the bond's book value at the beginning of Year 8 multiplied by the yield to maturity (9%). The book value at the beginning of Year 8 is found by compounding the initial price ($178.43) for 7 years at 9%, resulting in approximately $326.13. The interest expense is then 9% of $326.13, which is approximately $29.35.

Vogril Company Issued 20-Year, Zero Coupon Bonds with an Expected