Price of Debt Hasis Corporation issues noninterest-bearing debt, called zero-coupon bonds, with a maturity value of $10,000,000
Question:
Price of Debt Hasis Corporation issues noninterest-bearing debt, called zero-coupon bonds, with a maturity value of $10,000,000 in five years. Hasis will make no interest payments on the debt, and a single payment of
$10,000,000 will be paid when the debt matures in five years. Bedrock Financial Corporation is interested in purchasing all of the debt at the time of issue as an investment.
a. If Bedrock requires a 9 percent annual return on such investments, how much would the company be willing to pay for the entire issue?
b. If instead of noninterest-bearing debt Hasis issued 5 percent bonds that made cash interest payments of $500,000 at the end of each year for five years, with the full maturity value of the bonds due in five years, how much would Bedrock be willing to pay, again assuming it requires a 9 percent return?
Step by Step Answer:
Financial Accounting A Decision Making Approach
ISBN: 9780471328230
2nd Edition
Authors: Thomas E. King, Valdean C. Lembke, John H. Smith