Question

Zero Coupon Bonds

Use Table 1 and Table 2 to calculate present value answers.

The state of Idaho needs to raise $50,000,000 for highway repairs. Officials are considering issuing zero coupon bonds, which do not require periodic interest payments. The current market interest rate for the bonds is 10 percent.

What face value of bonds must be issued to raise the needed funds, assuming the bonds will be due in 30 years and compounded annually? Round your answer to the nearest million.

Face value of 30-year, 10% zero coupon bonds, compounded annually:

$   million

How would your answer change if the bonds were due in 50 years? Round your answer to two decimal places.

Face value of 50-year, 10% zero coupon bonds, compounded annually:

$   billion

How would both answers change if the market interest rate were 8 percent instead of 10 percent?

Face value of 30-year, 8% zero coupon bonds, compounded annually: Round your answer to the nearest million.	$   million
Face value of 50-year, 8% zero coupon bonds, compounded annually: Round your answer to two decimal places.	$   billion

Answer 1