Question: Zero coupon bonds do not make explicit interest payments each period and the return if based on the total price appreciation. However for tax purpose

Zero coupon bonds do not make explicit interest payments each period and the return if based on the total price appreciation. However for tax purpose the amount of price appreciation each period is calculated and considered as implicit interest or accured interest. Such implicit interst unfortunately becomes taxable income of that period for the investors even though no actual payment is received.

A zero coupon bond with a face value of $1000 is issued with an initial price of $463.34. The bond matures in 25 years. What is the implicit interest(in dollars) in the first and second year?

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