Question

ABC Inc needs to raise $111 million to expand operations. The CFO plans to sell 15-year zero-coupon bonds to fund the project. Bonds of similar maturity and risk are priced by the market to yield a 4.2% semiannual APR. What total face value of bonds must be sold to raise the cash?

Answer 1

Answer:

$207.06 million

Explanation:

First and foremost, it should be borne in mind that the price of a zero-coupon bond is the present value of its face value since the bond does not pay any coupons over its tenor as shown thus:

PV of bonds=FV/(1+i)^n

PV of bonds=amount required=$111 million

FV=face value=the unknown

i=semiannual yield = 4.2%/2=2.1%

n=number of semiannual periods in 15 years=15*2=30

$111=FV/(1+2.1%)^30

FV=$111*(1+2.1%)^30

FV=$207.06 million