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Q: Accounting problem ( Answered 3 out of 5 stars,   4 Comments )
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:3 out of 5 stars
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


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,

accountanttobe-ga rated this answer:3 out of 5 stars

Subject: Re: Accounting problem
From: myoarin-ga on 05 Sep 2005 15:04 PDT
Sounds like homework (see FAQs).  Just a tip:  you only need to
calculate one of the types of bonds.
Subject: Re: Accounting problem
From: accountanttobe-ga on 05 Sep 2005 15:51 PDT
It is.......and I am stuck.  :(
Subject: Re: Accounting problem
From: myoarin-ga on 05 Sep 2005 16:09 PDT
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
If not, there are calculators online that can handle present value, future value.

Good luck!
Subject: Re: Accounting problem
From: nelson-ga on 05 Sep 2005 16:54 PDT
Hi, myoarin-ga.  Only questions cannot contain Google.  Answers,
comments, and clarificatiosn can mention Google.

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