(1)
To compute: No. of normal bonds and zero-coupon bonds required to raise the amount.
Introduction: Investors invest in bonds to ensure regular income (interest income) on their investments. Bondholders are the investors who are risk averse.
(2)
To compute: Repayment amount for both coupon bonds and zero-coupon bonds.
Introduction: Investors invest in bonds to ensure regular income (interest income) on their investments. Bondholders are the investors who are risk averse.
(3)
To interpret: If one would wish to issue coupon bonds or zero-coupon bonds.
Introduction: Investors invest in bonds to ensure regular income (interest income) on their investments. Bondholders are the investors who are risk averse.
(4)
To discuss: About risk on T-bills.
Introduction: Investors invest in bonds to ensure regular income (interest income) on their investments. Bondholders are the investors who are risk averse.
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Chapter 8 Solutions
CORPORATE FINANCE - CONNECT ACCESS
- Q1: Suppose your company needs to raise $10 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 9 percent, and you’re evaluating two issue alternatives, a 9 percent annual coupon bond and a zero coupon bond. Your company's tax rate is 35 percent. a) How many of the coupon bonds would you need to issue to raise the $10 million? How many of the zero coupon bonds would you need to issue? b) In 30 years, what will your company's repayment be if you issue the coupon bonds? What if you issue the zero coupon bonds? c) Based on your answers in (a) and (b), why would you ever want to issue the zeroes? To answer, calculate the firm's after tax cash outflows for the first year under the two different scenarios.arrow_forwardSuppose your company needs to raise $10 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 9 percent, and you’re evaluating two issue alternatives: a 9 percent annual coupon bond and a zero coupon bond. Your company’s tax rate is 35 percent. How many of the coupon bonds would you need to issue to raise the $10 million? How many of the zeroes would you need to issue? In 30 years, what will your company’s repayment be if you issue the coupon bonds? What if you issue the zeroes? Based on your answers in (a) and (b), why would you ever want to issue the zeroes? To answer, calculate the firm’s after tax cash outflows for the first year under the two different scenarios. Assume the IRS amortization rules apply for the zero coupon bonds.arrow_forwardLantech investor is deciding between two bonds: Bond A pay $72 annual interest and has a market value of $925. It has 10 years to maturity. Bond B pays $62 annual interest and has a market value of $910. It has two years to maturity. Par value of the bonds is $1,000. A. What is the current yield on both bonds? B. Which bond should be chosen and why? C. A drawback of current yield is that is doesn't consider the total life of the bond. E.g. Yield to maturity on Bond A is 8.33 percent. What is the yield to maturity on Bond B? D. Is your answer changed from parts B and C based on which bond should be chosen?arrow_forward
- Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is $1,000. Maturity (Years) 1 2 3 4 5 Required: a. Calculate the forward rate of interest for each year. b. How could you construct a 1-year forward loan beginning in year 3? c. How could you construct a 1-year forward loan beginning in year 4? Required A Price $940.93 Complete this question by entering your answers in the tabs below. 868.39 800.92 735.40 670.48 Required B Maturity (years) 2 3 Calculate the forward rate of interest for each year. Note: Round your answers to 2 decimal places. Required C Forward Rate % % Prov 12 of 12 Nextarrow_forwardA bond that has features: coupon of rate of 5 percent principal: $1,000 term to maturity: 10 years a. what will the holder receive when the bond matures? b. if the current rate of interest on comparable debt is 8 percent, what should be the price of this bond? would you expect the firm to call this bond? why? c. if the bond has a sinking fund that requires the firm to set aside annually with a trustee sufficient funds to retire the entire issue at maturity, how much must the firm remit each year for ten years if the fundas earn 8 percent annually and there is $100 million oustanding?arrow_forwardSuppose your organization has issued a 30 year, 1,000,000 par-value bond with semi-annual coupons of 7%.25 years after issuance the owner of the bond offers to let your organization redeem the bond early. You can turn down the offer and redeem after 30 years. 1. Should you take the offer if:(a) the market interest rate is 6.5%(b) the market interest rate is 7.5%(c) the market interest rate is 7%(d) the market interest rate is 6.5% and redemption today requires a redemption of 1,200,000 2. What general rule for early redemption can you make?arrow_forward
- Jeremy Kohn is planning to invest in a 7-year bond that pays a 12 percent coupon. The current market rate for similar bonds is 8 percent. Assume semiannual coupon payments. What is the maximum price that should be paid for this bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.) $1188 $951 $1211 $1000arrow_forwardAssume that you wish to purchase a 30-year bond that has a maturity value of P1,000 and a coupon interest rate of 9.5%, paid semiannually. If you require a 6.75% rate of return on this investment, what is the maximum price that you should be willing to pay for this bond? P1,352 P1,450 P675 P1,111arrow_forwardSuppose your organization has issued a 30 year, 1,000,000 par-value bond with semi-annual coupons of 7%.25 years after issuance the owner of the bond offers to let your organization redeem the bond early. You can turn down the offer and redeem after 30 years. 1. Should you take the offer if: the market interest rate is 6.5% 2. Should you take the offer if: the market interest rate is 7.5% 3. Should you take the offer if: the market interest rate is 7% 4. Should you take the offer if: the market interest rate is 6.5% and redemption today requires a redemption of 1,200,000 5. What general rule for early redemption can you make? Sidenote: Show calculationsarrow_forward
- Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 10.7% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond? Select one: a. $874.74 b. $910.81 c. $1,000.99 d. $721.44 e. $901.80arrow_forwardWhat is the tex-equivalent interest rate needed if you purchase a municipal bond wiht a face value of %5000, a coupon rate of 4%, and a maturity date of 7 years? Assume you are in the 30% marginal federal tex bracket. 5.71% 3.30% 5.41% 7.21%arrow_forwardAssume a company plans to make two new bonds issues at the same time. Both will have the same coupon rate and maturity. The firm plans to sell the regular bond at face value, that is, at $1,000 per bond. The second bond will be callable. What must be true about the sale price of this second bond? The price of the bond will have to be lower than $1,000. The price of the bond will have to be higher than $1,000. The price of the bond will have to be equal to $1,000. The price of the bond will be whatever the firm wants it to be. It is not possible to make estimates about the price of the second bond.arrow_forward
- College Accounting, Chapters 1-27AccountingISBN:9781337794756Author:HEINTZ, James A.Publisher:Cengage Learning,
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