Zero-coupon bonds from a struggling foreign nation

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The US recently purchased $1 billion of 30-year zero-coupon bonds from a struggling foreign nation. The bonds yield 4.5% per year interest. Zero coupon means the bonds pay no annual interest payments. Instead, all interest is at the end of 30 years.

A US senator objected, claiming that the correct interest rate for bonds like this is 7.25%. The result, he said, was a multimillion dollar gift to the foreign country without the approval of Congress. Assuming the senator's rate is correct, how much will the foreign country have saved in interest?

Reference no: EM13742815

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