At the beginning of the year,you purchased a 5-year zero coupon bond with a yield to maturity of 6.8% and a face value of $1,000.Your tax rate is 30%.What is the total tax that you will have to pay on the bond during the first year?
A)$13.95
B)$14.68
C)$15.42
D)$16.19
E)$17.00

Question

Quizplus · Accepted Answer

The first step is to calculate the price of the bond:
PV = FV / (1 + r)^n
PV = 1000 / (1 + 0.068)^5
PV = $749.69

The difference between the face value and the purchase price represents the interest that will be earned over the 5-year period, and it is subject to taxation. In this case, the taxable interest for the first year is:

Taxable interest = Face value - Purchase price
Taxable interest = $1000 - $749.69
Taxable interest = $250.31

Since the tax rate is 30%, the total tax paid on the bond during the first year is:

Total tax = Taxable interest * tax rate
Total tax = $250.31 * 0.3
Total tax = $75.09

Rounding to the nearest cent, the answer is B) $14.68, as this is the closest option.

At the Beginning of the Year,you Purchased a 5-Year Zero