8 Problem 2 ker Corporation\'s 2016 financial statements included the following

Question

8 Problem 2 ker Corporation's 2016 financial statements included the following information in the long- White & Dec term debt disclosure note ($ in millions) 2016 $275 Zero-coupon subordinated debentures, due 2031: The disclosure note stated the debenture bonds were issued late in 2011 and have a maturity value of $500 million. The maturity value indicates the amount that White &Decker; will pay bondholders in 2031. Each individual bond has a maturity value (face amount) of $1,000. Zero-coupon bonds pay no cash interest during the ter value using the bonds' effective interest rate computed on an annual basis. m to maturity. The company is accreting (gradually increasing) the issue price to maturity Required 1. Determine the effective interest rate on the bonds. 2. Determine the issue price in late 2011 of a single, $1,000 maturity-value bond. (Please use Present Value or Future value charts from your textbook when needed).

Explanation / Answer

1) The effective interest rate can be determined by computing for the unknown present value of $1 factor for 15 annual periods:

PV of $1 factor = $275/500 = 0.55

Present value of $1: n = 15, i = ?

From the tables 2 in row 15, the value .55526 is in the 4% column. Thus 4% is the effective interest rate.

2) Using an effective annual rate of 4% and 20 periods

PV = $1,000 * .45639* = $456.39

Thus the issue price of one, $1,000 maturity-value bond was $456.39

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