Question

As finance executive of Marriott International, your company’s CEO wants you to manage the issuance of a 2-year zero-coupon bond with par value of $40 million. He also wants you to educate him on what the issuance would entail. Which of these would you tell her?

A. “We will have to focus on only the maturity risk premium for the Treasury bonds we have bought” B. “We will have to decide what the discount on the par value would be in order to sell the bond so the buyers are compensated with some capital appreciation upon maturity” C. “The maturity of the zero-coupon bonds does not matter” D. “We will have to decide on the discount rate for the zero-coupon bond’s maturity”

Answer 1

Solution:

Issuance of a 2 year zero coupon bond with par value of $40mn.

Normally, they rise when stock market falls.

(A)We will have to focus on only the maturity risk premium for the Treasury bonds we have bought-----Investors holding a risky bond should be rewarded.

(B)We will have to decide what the discount on the par value would be in order to sell the bond so the buyers are compensated with some capital appreciation upon maturity----------Difference between purchase price of the zero coupon bond and the par value is normallt the investor's return.

(C)The maturity of the zero-coupon bonds does not matter-------They may not reach maturity for good number of years, so if the credit rating is good of the company, then only the investors come to buy in the market.

(D)We will have to decide on the discount rate for the zero-coupon bond’s maturity-------Discount rate should be decided as there are no interest payments. Investor's play on the difference returns.