Zero Coupon Bonds suppose your company needs to raise $20 million and you want to issue 30-year
Question:
Zero Coupon Bonds suppose your company needs to raise $20 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 7 percent, and you’re evaluating two issue alternatives: a 7 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 $20 million? How many of the zeroes 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 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 after tax cash outflows for the first year under the two different scenarios. Assume the IRS amortization rules apply for the zero coupon bonds.
CouponA coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...
Step by Step Answer:
a T he coupon bonds have a 7 coupon which matches the 7 required return so they will sell at par The number of bonds that must be sold is the amount n...View the full answer
Fundamentals of Corporate Finance
ISBN: 978-0077861629
8th Edition
Authors: Stephen A. Ross, Randolph W. Westerfield, Bradford D.Jordan
