Jiminy’s Cricket Farm issued a zero coupon bond with 15 years left to maturity;

Question

Jiminy’s Cricket Farm issued a zero coupon bond with 15 years left to maturity; the book value of this issue is $35 million, and the bonds sell for 51 percent of par.

Calculate the pre-tax cost of the debt (the yield to maturity) quoted as an EAR. (Enter answer as a percent rounded to two decimals.) Yield to Maturity =%

What is the pre-tax cost of the debt (yield to maturity) quoted as an APR with semi-annual compounding? (Don't round the EAR if you try converting the EAR into an APR. Enter the APR as a percent rounded to two decimals.) Yield to Maturity =%

Explanation / Answer

Let the EAR be r

1000 = 510 * (1+r)15

a. EAR = 4.59%

b. APR = (1.0459^1/2 - 1 )* 2 = 4.54%

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