Question
I really need help figuring out these homework problems, Need answers by Saturday. 1. Zero coupon bonds do not make explicit interest payments each period
I really need help figuring out these homework problems, Need answers by Saturday.
1. Zero coupon bonds do not make explicit interest payments each period and the return is based on the total price appreciation. However, for tax purpose, the amount of price appreciation each period is calculated and considered as 'implicit interest' or 'accrued interest'. Such implicit interest unfortunately becomes taxable income of that period for the investors even though no actual payment is received.
Q: A zero coupon bond with a face value of $1,000 is issued with an initial price of $463.34. The bond matures in 25 years. What is the implicit interest (in dollars) in thefirstandsecondyear?
[Hint: There are several ways to solve this problem and here are some tips on one approach. Implicit interest ($) in each period is equivalent to the amount of price appreciation of the same period. To estimate bond prices at different points of time, an implicit interest rate can be estimated. This implicit interest rate will be used as a discount rate to estimate the bond prices at each period.]
2. Shidao Co. has issued 9% annual coupon bonds that are now selling at a yield to maturity of 10% and current yield of 9.875%. Assume these bonds carry a face value of $1,000. What is the remaining maturity of these bonds?
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