1. Suppose your company needs to raise $28 million and you want to issue 20-year
ID: 2741176 • Letter: 1
Question
1. Suppose your company needs to raise $28 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 8 percent, and you're evaluating two issue alternatives: an 8 percent annual coupon and a zero coupon bond. Your company's tax rate is 25 percent. In 20 years, what will your company's repayment be if you issue the coupon bonds? What if you issue the zeros? (Assume annual compounding on the zero coupon bond.)
$28.00 million; $122.12 million
$28.00 million; $130.51 million
$30.00 million; $122.12 million
$30.24 million; $130.51 million
$30.24 million; $122.12 million
A zero coupon bond with a face value of $1,000 is issued with an initial price of $450.50. The bond matures in 17 years. What is the implicit interest, in dollars, for the first year of the bond's life? Use semiannual compounding.
a)$6.49
b)$21.63
c)$10.82
d)$12.98
e)$11.71
Explanation / Answer
Number of bonds to be issued:
= $28,000,000/$214.55
= 130,505 bonds
Repayment of ZEROs will be $130.51 Million
As, coupon rate and interest rate is same, coupon rate bond will sell at par. So bonds to be issued will be 28,000 ($28,000,000/$1,000)
So correct option is $28.00 million; $130.51 million
1 Face value (FV) $ 1,000 2 Coupon rate 0.00% 3 Number of compounding periods per year 1 4 = 1*2/3 Interest per period (PMT) $ - 5 Number of years to maturity 20 6 = 3*5 Number of compounding periods till maturity (NPER) 20 7 Market rate of return/Required rate of return 8.00% 8 = 7/3 Market rate of return/Required rate of return per period (RATE) 8.00% Zero coupon bond price PV(RATE,NPER,PMT,FV)*-1 Zero coupon bond price $ 214.55Related Questions
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