Question 4 (20 marks)

Consider a zero-coupon debt with a face value of $1,000 issued on December 31, 2040. The bond has three years to maturity and a yield to maturity of 5%.

Required: Compute the price of the zero-coupon debt as of December 31, 2040 and find interest expenses and the balance of the debt principal to be reported at the end of each year, 2041 through 2043.

*For full credit, you must show the steps/calculation toward your results.