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Q-10-33I

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Essentials Of Investments
Found in: Page 330
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

Question: 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

See the step by step solution

Step by Step Solution

Step 1: Definition

The assumed collection of tax which was not actually collected is known as imputed interest income.

Step 2: Calculation of Imputed 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

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