Question

my question is Q 29, zero coupon bonds ( part b and c continue on next page), thank you so much !

IOU (OU) 5.7 Apr 19, 2028 108.96 ?? 1.827 27. Bond Prices versus Yields [LO2) a. What is the relationship between the price of a bond and its YTM? b. Explain why some bonds sell at a premium over par value while other bonds sell at a discount. What do you know about the relationship between the coupon rate and the YTM for premium bonds? What about for discount bonds? For bonds selling at par value? c. What is the relationship between the current yield and YTM for premium bonds? For discount bonds? For bonds selling at par value? Interest on Zeroes (LO2] Imagination Dragons Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds with a par value of $1.000 each to raise the money. The required return on the bonds will be 5.8 percent. Assume semiannual compounding periods. a. What will these bonds sell for at issuance? b. Using the IRS amortization rule, what interest deduction can the company take on these bonds in the first year? In the last year? c. Repeat part (b) using the straight-line method for the interest deduction. d. Based on your answers in (b) and (c), which interest deduction method would the company prefer? Why? 29. Zero Coupon Bonds [LO2] Suppose your company needs to raise $47 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 6 percent, and you're evaluating two issue alternatives: a semiannual coupon bond with a coupon rate of 6 percent and a zero coupon bond. Your company's tax rate is 35 percent. Both bonds will have a par value of $1,000. a. How many of the coupon bonds would you need to issue to raise the $47 million? How many of the zeroes would you need to issue?

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

1 Ale w (2 v 1x B: ENG 00-13 21-02-2020 26 00781 - Fax a X a CK CL CM I CN co CP Q CR as a 778 779 FACE VALUE 1000 780 781 782 783 years YTM PERIODS AMOUNT NEEDED 6.0% 2 47000000 784 785 OPITON 1 COUPON 6.0% 786 787 788 AS COUPON RATE AND YTM ARE SAME BONDS WILL BE ISSUED AT PAR NO OF COUPON BONDS NEED TO ISSUE = 789 a-1 47000000/1000 = 47000 790 791 792 OPTION 2 ZERO COUPON BOND PRICE $ 306.56 (=PV(CL781/CL782,CL780*CL782,,-CL779)] 793 794 a-2 NO OF ZERO COUPON BONDS NEED TO ISSUE = 47000000/306.56 = 153315.78 153316 795 796 797 47000 X 1000 = 798 799 800 PRINCIPAL LAST 6 MONTHS COUPON = 47000000 X 6%/2 COUPON BONDS REPAYMENT 47000000 1410000 48410000 b-1 YIELD SPOT AFN BANKING NOTE Sheet251 53 CLEAN PRICE S10 BIDDING, UNDERWRITING EUAC AW LIFE LP, IP, MRP, INFLATION WARR... |

1 Ale w (2 v 1x B: ENG 00-13 21-02-2020 26 C0818 - Fax a X a CK CL CM I CN co CP Q CR as a 795 796 797 47000 X 1000 = PRINCIPAL LAST 6 MONTHS COUPON = 47000000 X 6%/2 COUPON BONDS REPAYMENT 47000000 1410000 799 800 b-1 48410000 801 802 IN ZERO COUPON BOND, THERE IS NO INTEREST SO AMOUNT OF REPAYMENT = 153315.78 X 1000 = b-2 803 804 153315776 (taken no of zero coupon bonds without rounding] 805 COUPON PAYMENT AFTER TAX 47000000 *6%*(1-0.35) = 1833000 806 807 808 809 810 811 812 IN CASE OF ZERO COUPON BOND, NO INTEREST IS PAID SO WE HAVE TO CALCULATE PRICE AT THE ISSUE TIME $ 306.56 PRICE AT THE END OF THE YEAR $325.23 (=PV(CL781/2,19*2,,-CL779)] THIS DIFFERENCE IS NOTHING BUT CASH FLOW FOR COMPANY AS TAX DEDUCTIBILITY (325.23-306.56)* 153315.78*(0.35) = 1001805 813 814 COUPON BOND CASH FLOW ZERO COUPON BOND CASH FLOW OUTFLOW INFLOW 1833000 1001805 (taken no of zero coupon bonds without rounding) 815 816 817 818 YIELD SPOT AFN BANKING NOTE Sheet251 53 CLEAN PRICE S10 BIDDING, UNDERWRITING EUAC AW LIFE LP, IP, MRP, INFLATION WARR... :