In: Finance
Assume Moore Ltd. issues a 25-year zero-coupon bond with a face
value of $75 million.
The bond was issued to yield 6.4% per year (which equated to the
market’s required rate
of return on Moore’s debt).
a. What should the market value of the bond be at the time of
issue?
b. What amount will the purchaser of the bond record on its books
as Investment –
Bond.
c. What will the value of that account (Investment – Bond) be at
the end of the last
day of 25th year (i.e., at maturity)?
d. What best explains how that Investment – Bond account value
changed over that
25-year period on the books of the investor (for simplicity sake,
assume that the
original purchaser of the bond held it until its maturity)?
Solution:
Given:
We have a zero coupon bond of $75 million issued at yield of 6.4%.
a.
Market Value of the bond is the present value of the bond i.e. present value of $75 million the purchaser will receive after 25 years discountd at yield rate of 6.4%.
Market Value of bond = 75/(1+6.4%)^25 = $15.90
b.
The purchaser will record the amount it paid for investing in the bond i.e. $15.90.
c.
At the maturity, the Investment- Bond account will equal face value of $75 million
d.
Interest at the yield rate gets added to the Investment -Bond account each year. Below computations will give you the clarity.
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