Q-10-33I
Expert-verifiedQuestion: A newly issued 20-year maturity, zero-coupon bond is issued with a yield to maturity of 8% and face value $1,000. Find the imputed interest income in the first, second, and last year of the bond’s life.
Answer
1st Year = $17.15
2nd Year = $ 18.54
Last Year = $74.07
The assumed collection of tax which was not actually collected is known as imputed interest income.
Year | Remaining Maturity (T) | Constant Yield Value (1000/1.08)^{T} | Imputed interest (Increase in constant yield value) |
0 | 20 | $214.55 | |
1 | 19 | $231.71 | $17.16 |
2 | 18 | $250.25 | $18.54 |
19 | 1 | $925.93 | |
20 | 0 | $1000 | $74.07 |
Return to Table 10.1 and calculate both the real and nominal rates of return on the TIPS bond in the second and third years.
Time | Inflation in Year just ended | Par Value | Coupon Payment | Coupon Payment + Principal payment | Total Payment |
0 | $ 1000 .00 | ||||
1 | 2 | $ 1020.00 | $ 40.80 | 0 | $ 40.80 |
2 | 3 | $ 1050. 60 | $ 42.02 | 0 | $ 42.02 |
3 | 1 | $ 1061.11 | $ 42.44 | $ 1061.11 | 1103.54 |
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