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Zero coupon bond

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Assume that you just purchased a zero coupon bond with a yield to maturity of 9 percent. The bond matures in 12 years, and has a face value of $1,000. Your tax rate is 25 percent. What is the dollar amount of the tax that you will pay on the bond at the end of the first year of holding the bond?

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The solution explains how to calculate the amount of tax to be paid on a zero coupon bond interest income.

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A zero coupon bond is issued at a deep discount and redeemed at par value on maturity. There is no interest paid during the life of the bond. For tax purposes, an ...

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