my question is Q 29, zero coupon bonds ( part b and c continue on next page), thank you so much !
IOU (OU) 5.7 Apr 19, 2028 108.96 ?? 1.827 27. Bond Prices versus Yields [LO2) a. What is the relationship between the price of a bond and its YTM? b. Explain why some bonds sell at a premium over par value while other bonds sell at a discount. What do you know about the relationship between the coupon rate and the YTM for premium bonds? What about for discount bonds? For bonds selling at par value? c. What is the relationship between the current yield and YTM for premium bonds? For discount bonds? For bonds selling at par value? Interest on Zeroes (LO2] 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? 29. Zero Coupon Bonds [LO2] Suppose your company needs to raise $47 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 6 percent, and you're evaluating two issue alternatives: a semiannual coupon bond with a coupon rate of 6 percent and a zero coupon bond. Your company's tax rate is 35 percent. Both bonds will have a par value of $1,000. a. How many of the coupon bonds would you need to issue to raise the $47 million? How many of the zeroes would you need to issue? PART 3 Valuation of Future Cash Flows CHALLENGE stions 32-38) b. In 20 years, what will your company's repayment be if you issue the coupon bonds? What if you issue the zeroes? c. Based on your answers in (a) and (b). why would you ever want to issue the zeroes? To answer, calculate the firm's aftertax cash outflows for the first year under the two different scenarios. Assume the IRS amortization rules apply for the zero coupon bonds. 30. Finding the Maturity [LO2] You've just found a 10 percent coupon bond on the market that sells for par value. What is the maturity on this bond? 31. Real Cash Flows [LO4] You want to have $2.6 million in real dollars in an account when you retire in 40 years. The nominal return on your investment is 10.8 percent and the inflation rate is 3.7 percent. What real amount must you deposit each year to achieve your goal? 32. Components of Bond Returns (LO2] Bond P is a premium bond with a coupon rate of 10 percent. Bond D has a coupon rate of 4 percent and is currently selling at a discount. Both bonds make annual payments, have a YTM of 7 percent, and have 10 years to maturity. What is the current yield for bond P? For bond D? If interest rates remain unchanged, what is the expected capital gains yield over the next year for bond P? For bond D7 Explain your answers and the interrelationships among the various types of yields. 33. Holding Period Yield (LO2] The YTM on a bond is the interest rate you earn on your investment if interest rates don't change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY). Suppose that today you buy a bond with an annual coupon rate of 7 percent for $1.060. The bond has 17 years to maturity. What rate of return do you expect to carn on your investment? Assume a par value of $1.000. h. Two years from now, the YTM on your bond has declined by 1 percent, and you decide to sell. What price will your bond sell for? What is the HPY on your investment? Compare this yield to the YTM when you first bought the bond. Why are they different? Bonds 01
