Your firm wishes to raise 10,000,000 by either issuing regular coupon bonds or issuing zero coupon...

Your firm wishes to raise 10,000,000 by either issuing regular coupon bonds or issuing zero coupon bonds. The regular coupon bonds will have a 10% coupon rate. Both issues are expected to mature in 12 years,pay annual, and have a yield of 6%.

a.If they opted to go with regular bonds, what is the firms total repayment in year 12?

b.If they opted to go with zero coupon bonds, what is the firms total repayment in year 12?

please explain repayment portion ^^^

Expert Solution

Price of the coupon bonds is calculated as below:

nper	12
PMT	100
Rate	6%
FV	1000

Selling price	1335.35	[ -pv(rate, nper, pmt,fv)]

a1. No of coupon bonds sold = 10,000,000 / $1335.35 = 7489 bonds

a2. Price of the zero coupon bonds = 1000 / ( 1+ 10%) ¹² = 318.63

No of zeroes to be issued = 10,000,000 / $318.63= 31384 bonds

b1. Repayment of coupon bonds = 7489 *(1000 + 1000* 10%) = 8,237,541

Reason: The coupon bonds are repaid along with the interest i.e. the coupon amount at the time of repayment . In this case they are repaid at a value of $1100 ( face value + interest of 100) during redemption.

b2. Repayment of zeroes =31384 * 1000 = 31,384,000

Reason: Zero coupon bonds are issued at a discount since they do not carry any interest while at the time of redemption they are paid in full at face value.

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jeff jeffy answered 5 months ago

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