Two new debt securities have caught the attention of your committee, the FASB, the SEC, Congress, and the Treasury Department. Draper, Inc., recently completed a $200 million offering of so-called century bonds that mature in 21X1, or in 100 years. Castle Company announced that it will issue $250 million of millennium bonds that mature in 30X1, or in 1,000 years. Neither company is a client of your firm. The Treasury Department and Congress have proposed limiting interest deductions for long-term bonds to 40 years. They argue that 100-year debt should be treated the same as equity because the bonds are more like permanent capital. Their reasoning is that given that stock dividend payments cannot be deducted from taxable income, interest payments on the last 60 years of 100-year debt should not be deducted.

Suppose that Draper, Inc., issued its $200 million century bonds on January 1, 20X1, To keep things easy, also assume that the bonds pay interest just one a year, on December 31.

Suppose that the Draper century bonds were issued with a stated rate of 7.5% when the market yield rate was 8.5%. What would the issue price be? How about if the market yield were 6.5%?