Question

A firm issues a $5 million zero coupon bond with a maturity of four years when market rates are 8%. Assuming semiannual compounding periods, the total interest on this bond is:

A) $1,600,000.
B) $1,346,549.
C) $1,200,000.

Answer 1

Answer:

B) $1,346,549

Explanation:

maturity of 4 years; t = 4

semi compounding period ; n = 2

rate; i = 8% = 8/100

future value; FV = 5,000,000

using $FV = PV *[1 + (i / n )]^{(n * t)}$

present value; PV = 3,653,451

PV is the amount generated when it was originally issued.

interest paid = 5,000,000 - 3,653,451

= 1,346,549