Pangaea Corporation needs to raise funds to finance a plant expansion, and it ha

Question

Pangaea Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds to raise the money. The required return on the bonds will be 7 percent.

What will these bonds sell for at issuance? (Round your answer to 2 decimal places. (e.g., 32.16))

Using the IRS amortization rule, what interest deduction can the company take on these bonds in the first year? In the last year? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

Pangaea Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds to raise the money. The required return on the bonds will be 7 percent.

Explanation / Answer

a. At the time of issuance a zero-coupen bond, carrying 9% pa interest and with maturity value of 100 after 25 years, will sell at 11.6 by using the following forluma:

Amount = Principal(1+r/100)^n

100 = Principal(1+9/100)^25

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b. Interest deduction for the first year will be 1.04 as:

(11.6/100)*9 = 1.04

c. Each year calculate interest according to the following formula:

Amount = Principal(1+r/100)^n = 11.6(1+9/100)^n

For the 1st year, the value of 'n' will be 1

For the 2nd year, the value of 'n' will be 2

For the 3rd year, the value of 'n' will be 3
.
.
.
For the 25th year, the value of 'n' will be 25

Interest for a year = Amount for previous year - Amount for the current year

c.1 If the intention is to follow straight line method, the calculations can be made as per following formula:

(100-11.6)/25 = 88.4/25 = 3.54 per annum.

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