Zero-Coupon Bonds Coal Corporation is considering alternatives to provide funding for the future expansion of its mining activities. Management is concerned, however, that the company might have trouble meeting interest payments on additional debt until the new mining activities start producing revenues in several years. The controller of Coal Corporation has suggested that the company issue $500,000 of 10-year zero-coupon bonds. The effective annual interest rate for Coal Corporation is 12 percent.

a. Determine the issue price of the bonds and show how the bonds would be reported in Coal’s balance sheet immediately after issuance.

b. The president of Coal Corporation was astonished to learn that the company would receive more money if it sold

$350,000 of 12 percent, 10-year bonds. Explain why this is true. How much would the company receive if the market rate of interest is 12 percent?

c. Why might it be more desirable for Coal Corporation to issue $500,000 of zero-coupon bonds rather than

$350,000 of interest-bearing bonds?