Question

A company issued $1000 par value 20- year zero coupon bonds on jan.1,2020. The purpose was to raise $100 million of funding for future development. Yield to Maturity on this bond is 3.5%

1. Calculate the total cash amount that the company needed to have available on the maturity date of jan.1,2040 to pay all the bondholders?

2. Use the IRS amortization rule to calculate the company's total interest expense for on the bonds for 2020/

Answer 1

1

Issue price of bonds is:

Particulars	Cash flow	Discount factor	Discounted cash flow
present value Interest payments-Annuity (3.5%,20 periods)	$                                -	14.21240	$                         -
Present value of bond face amount -Present value (3.5%,20 periods)	$                    1,000.00	0.50257	$                502.57
Bond price			$                502.57

Each bond is issued for 502.57

Number of bonds issued = 100,000,000/ 502.57 = 198,977.26

Amount required at maturity to payoff bonds = 198,977.26 * 1,000 = 198,977,260

2

Interest for the year = 502.57 * 198,977.26 * 3.5% = 3,500,000

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