JCPenney Company once issued bonds for 33.24 (percent of face value), with a face value of $200 million and a stated interest rate of zero, which matured eight years later. That same year, Martin Marietta, Northwest Industries, and Alcoa also issued bonds with stated interest rates of zero.

a. Why would an investor purchase a bond with a stated interest rate of zero?
b. Compute the effective interest rate on the bond issuance.
c. In terms of its cash flows, explain why a company might wish to issue bonds with a stated interest rate of zero.
d. At what price would the bonds have been issued if the stated interest rate had been 5 percent? 18 percent? Assume that interest payments would be made annually.

  • CreatedAugust 19, 2014
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