Jia Hua Enterprises wants to issue sixty 20-year, $1,000 par value, zero-coupon bonds. If each bond is priced to yield 7 percent, how much will Jia Hua receive (ignoring issuance costs) when the bonds are first sold?

Question

Quizplus · Accepted Answer

Each bond has a face value of $1,000 and will be priced to yield 7 percent, meaning investors will pay a discounted rate of 0.07/2 = 0.035 per half-year period. With a maturity of 20 years and semi-annual compounding, each bond will have 40 periods. Therefore, the present value of each bond can be calculated using the following formula:

PV = 1000 / (1 + 0.035)^40 = $214.37

The total amount Jia Hua will receive when the bonds are first sold is equal to the sum of the present values of all 60 bonds:

Total amount = 60 x $214.37 = $12,862.20

Therefore, the closest answer choice is C, $15,505.

Jia Hua Enterprises Wants to Issue Sixty 20-Year, $1,000 Par