ABC Corp. needs $8,000,000 of debt for a quarter share fractional ownership of a Gulfstream IV executive jet. If the company's investment banker has offered to raise the financing by way of a zero coupon (strip) bond with a yield to maturity in 15 years of 6%, what will ABC Corporation's total cash outflow be at maturity?

Question

Quizplus · Accepted Answer

To calculate the total cash outflow at maturity, we need to find the face value of the bond, which will be the amount of debt raised by ABC Corp. We can use the formula for present value of a zero coupon bond:

PV = FV / (1 + r)^n

Where PV = present value (or price) of the bond, FV = face value of the bond (or amount of debt raised), r = yield to maturity, and n = number of years to maturity.

Substituting the given values:

PV = 0 (since zero coupon bond)
FV = $8,000,000
r = 6%
n = 15

FV = PV x (1 + r)^n
FV = 0 x (1 + 0.06)^15
FV = $19,197,052.71

Therefore, ABC Corp. will have to pay $19.2 million at maturity to redeem the bond and repay the debt.

ABC Corp Needs $8,000,000 of Debt for a Quarter Share Fractional