Question

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Intro Concordant Inc. wants to raise $50 million by issuing 10-year zero-coupon bonds with a yield to maturity (EAR) of 5.9%. Part 1 | Attempt 1/10 for 10 pts. What should be the total face value of the bonds (in $ million)? No decimals Submit

Answer 1

Question 1:

The total face value of the bonds can be calculated with the use of following equation:

Face Value of the Bonds = Amount to be Raised*(1+EAR)^Years

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Here, Amount to be Raised = $50 million, EAR = 5.9% and Years = 10

Substituting these values in the above equation, we get,

Face Value of the Bonds = 50*(1+5.9%)^10 = $88.70 or $89 million

Answer is $89 million.

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Question 2:

The price of the risk-free zero coupon bond is calculated as follows:

Price of Risk-Free Zero Coupon Bond = Coupon Payment Year 1/(1+Spot Rate Year 1)^1 + Coupon Payment Year 2/(1+Spot Rate Year 2)^2 + (Coupon Payment Year 3+Face Value of Bonds)/(1+Spot Rate Year 3)^3

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Here, Coupon Payment Year 1 = 0, Coupon Payment Year 2 = 0, Coupon Payment Year 3 = 0, Face Value of Bonds = $1,000, Spot Rate Year 1 = 1.7%, Spot Rate Year 2 = 2.8% and Spot Rate Year 3 = 3.1%

Substituting these values in the above equation, we get,

Price of Risk-Free Zero Coupon Bond = 0/(1+1.7%)^1 + 0/(1+2.8%)^2 + (0+1,000)/(1+3.1%)^3 = $912.48 or $912

Answer is $912.