JCPenney Company once issued bonds for 33.24 (percent of face value), with a face value of $200

Question:

JCPenney Company once issued bonds for 33.24 (percent of face value), with a face value of $200 million and a stated interest rate of zero, which matured eight years later. That same year, Martin Marietta, Northwest Industries, and Alcoa also issued bonds with stated interest rates of zero.

REQUIRED:

a. Why would an investor purchase a bond with a stated interest rate of zero?

b. Compute the effective interest rate on the bond issuance.

c. In terms of its cash flows, explain why a company might wish to issue bonds with a stated interest rate of zero.

d. At what price would the bonds have been issued if the stated interest rate had been 5 percent? 18 percent? Assume that interest payments would be made annually.

Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...