Bonds from a struggling foreign nation

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Reference no: EM131807695

The U.S. recently purchased $1 billion of 30-year zero-coupon bonds from a struggling foreign nation. The bonds yield 41/2% per year interest. The zero-coupon bonds pay no interest during their 30-year life. Instead, at the end of 30 years, the U.S. government is to receive back its $1 billion together with interest at 41/2% per year A U.S. senator objected to the purchase, claiming that the correct interest rate for bonds like this is 51/4%. The result, he said, was a multimillion dollar gift to the foreign country without the approval of Congress. Assuming the senator's math is correct, how much will the foreign country have saved in interest when it repays the bonds at 41/2% instead of 51/4% at the end of 30 years?

Reference no: EM131807695

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