"ZERO COUPON BONDS. FINANCING A COLLEGE EDUCATION. A zero coupon bond is a bond without a nominal interest rate that pays its nominal or face value FACEVAL at maturity in TERMYRS years. It is similar to a treasury bill because it is purchased at a price PURPRICE which has a steep discount from its face value. 'Interest' payments are usually added to the present value twice each year (semiannually). Because it lacks a nominal interest rate, for tax purposes, one must calculate a yearly interest throughoutits lifetime of TERMYRS. In the following treatment a nominal annual, or simple,interest rate ANNRATE% is calculated for the 'zero' assuming that the purchase price will grow to the face value with semiannual compounding. EFFRATE% is the effective rate. PRESVAL is the present value of the 'zero' at the end of a given year YEAR#. INTRPAID is the amount of interest for year YEAR# that one should report as income. Type any key to exit. (c) PCSCC, Inc., 1993 *** Answers to Problems *** (a) Set FACEVAL=60,000, PURPRICE=16,325, TERMYRS=18 and YEAR#=0.5, the interest paid is estimated as $601.06. (b) Set YEAR#=1.5, the interest paid is now estimated at $1269.33. ||Mr. Jones estimates that he will need $60,000 to pay for his newly-born daughter's college education in 18 years. He purchases 60 $1,000 'zeros' which mature in 18 years on the open market for $16,325 on July 1st. (a) What should he report as interest income for the first year YEAR#=0.5? (b) What must he report as interest income for the second year (YEAR#=1.5)? Type comma key to see answers. Type (F2) to return to application file."
