Question

Debt Valuation: Zero-Coupon Debentures

At the beginning of the year, KMF Inc. issued $50 million (maturity value) of 15-year, zero-coupon debentures, at a time when the yield rate was four percent per period. The KMF, Inc. bonds would be subject to semiannual compounding.

Round all answers to the nearest whole number.

Calculate the proceeds received by KMF Inc. when the bonds were sold.

$Answer

Calculate the cost to repurchase and retire the bonds after five years assuming that the market yield rate at that time is five percent per period.

Book value of bonds at time of repurchase:	Answer
Market value of bonds at time of repurchase:	Answer
AnswerGainLoss	Answer

Answer 1

Maturity value	5,00,00,000
Yield rate	4%
Semi annual yield rate	2%
Number of years	15 years
Number of periods (semi annual compounding)	30
Issue price=	Maturity value/(1+i)^n
	where i is the yield rate
	n is the number of periods
=	50000000/ (1+0.02)^30
=	50000000/ 1.811361584
=	2,76,03,544
The proceeds received by KMF Inc. When the bonds were sold are $ 2,76,03,544

Calculation of cost to repurchase and retire the bonds after five years
Prevailing yield rate	5%
Semi annual yield rate	2.5%
PV=	Maturity value/(1+i)^n
=	50000000/ (1.025)^20
=	3,05,13,547
here the number of periods taken are 20 as the bonds would be repurchased after 5 years on the prevailing market rate and hence the remainiing life of bonds would be 10 years i.e 20 periods when calculated semi annually