Suppose you purchase a zero coupon bond with face value $1,000, maturing in 25 years, for $180. What is the implicit interest, in dollars, in the first year of the bond’s life?

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Suppose you purchase a zero coupon bond with face value $1,000, maturing in 25 years, for $180. What is the implicit interest, in dollars, in the first year of the bond’s life?

  1. A) $  86
  2. B) $  84
  3. C) $12.78
  4. D) $19.27
  5. E) $30.00
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Answer: C

1000 FV, 25 N, -180 PV, CPT I/Y = YTM = 7.1%; Year 1 interest = $180 x .071 = $12.78

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