Imagination Dragons Corporation needs to raise funds to finance a plant expansion, and it has decided to

Question:

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?

Compounding
Compounding is the process in which an asset's earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth, calculated using exponential functions, occurs because the investment will... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...