Consider a $1,000-par-value 20-year zero-coupon bond issued at a yield to maturity of 10%. If you buy that bond when it is issued and continue to hold the bond as yields decline to 9%, the imputed interest income for the first year of that bond is

$14.87

Explanation:

Computation the imputed interest income for the first year of the bond

First step

Using this formula

Imputed interest income= Par value/(1+yield to maturity)^Numbers of years

Let plug in the formula

Imputed interest income$1,000/(1.10)^20

Imputed interest income= $1,000/6.72749

Imputed interest income=$148.64

Second step

Imputed interest income=$1,000/(1.10)^19= Imputed interest income=$1,000/6.11590

Imputed interest income=$163.51

Hence,

Imputed interest income=$163.51 - $148.64

Imputed interest income= $14.87

Therefore the imputed interest income for the first year of the bond will be $14.87

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