At the beginning of the year, KMF Inc. issued \($200\) million aturity value) of 15-year, zero-coupon debentures, at a time when the yield rate was four percent per period. The KMF, Inc. bonds would be subject to semiannual compounding.

Required

1. Calculate the proceeds to be received by KMF Inc. when the bonds are sold.

2. Calculate the cost to repurchase and retire the bonds after five years assuming that the market yield rate at that time is five percent per period. Is the early retirement of debt a good decision in this set of circumstances? What factors did you consider in reaching your decision?

3. Under what circumstances would a company consider issuing zero-coupon debentures instead of regular interest-bearing debentures?