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 Subject: Accounting problem Category: Business and Money > Accounting Asked by: accountanttobe-ga List Price: \$10.00 Posted: 05 Sep 2005 13:19 PDT Expires: 05 Oct 2005 13:19 PDT Question ID: 564548
 ```Zero Coupon Bonds. Suppose your company needs to raise \$15 Million and you want to issues 20-year bonds for this purpose. Assume the required return on your bond issue will be 8 percent, and you are evaluating two issues alternatives: an 8 percent annual coupon bond and a zero coupon bond. How many of the coupon bonds would you need to issue to raise \$15 Million? How many of the Zero Coupon Bonds would you need to issue?``` Clarification of Question by accountanttobe-ga on 05 Sep 2005 13:21 PDT `I need this by 10 PM MST. Thank you sooooo much!`
 Subject: Re: Accounting problem Answered By: omnivorous-ga on 05 Sep 2005 17:25 PDT Rated:
 ```Accountanttobe ? There?s a major assumption that needs to be made here because it?s the only way that we can answer this question: your 8% bonds would be issued at par value (100% value or \$15 million). In this case, the market for corporate bonds requires a return of 8% -- whether on zero-coupons or annual returns. (There?s also a minor assumption -- which is covered in the question: that the 8% in bond interest is paid annually. Paid quarterly or semi-annually it will actually have a slightly higher rate of return due to compounding.) So the question becomes: if you receive \$15 million, what will it be worth in 20 years, compounded at 8% per year. FV = PV * (1 + i)^t Where, FV = future value PV = present value i = interest rate (in decimals) t = number of complete years FV = \$15,000,000 * (1.08)^20 FV = \$15 million * 4.6610 = \$69,914,357 There is no Google search strategy here, as this is a simple PV/FV question. Best regards, Omnivorous-GA```

 ```Sounds like homework (see FAQs). Just a tip: you only need to calculate one of the types of bonds.```
 `It is.......and I am stuck. :(`
 ```You're honest, anyway, which is unusual on this type of question. Get out the book and read about bonds. Bonds with an 8% coupon: what does that tell you? The interest is paid by the coupons, so ... Zero bonds: search göögle and you should find a suggestion of what you need to calculate, and if you are taking the course, you probably have a pocket calculator that can do it: financial/cash flow functions. If not, there are calculators online that can handle present value, future value. Good luck!```
 ```Hi, myoarin-ga. Only questions cannot contain Google. Answers, comments, and clarificatiosn can mention Google.```