French energy giant GDF Suez recently issued a zero coupon bond. This bond issuance garnered attention because

Question:

French energy giant GDF Suez recently issued a zero coupon bond. This bond issuance garnered attention because it was the first time in 14 years that a zero coupon bond had been issued in euros. The zero coupon bond has a face value of €500 million and matures in two years. Assume that when the bonds were sold to the public, the annual market rate of interest was 3 percent.

Required:

1. Explain why an investor would buy a bond with a zero coupon (interest) rate.

2. If investors could earn 3 percent on similar investments, how much did GDF Suez receive when it issued the bonds with a face value of €500 million?

3. How much would GDF Suez have received if the annual market rate of interest remained at 3 percent, but the bonds did not mature for 10 years?

Coupon
A 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... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...

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