Question

White & Decker Corporation’s 2018 financial statements included the following information in the long-term debt disclosure note:

Zero-coupon subordinated debentures, due 2033:   2018

$422 ($ in millions)

The disclosure note stated the debenture bonds were issued late in 2013 and have a maturity value of $660 million. The maturity value indicates the amount that White & Decker will pay bondholders in 2033. Each individual bond has a maturity value (face amount) of $1,160. Zero-coupon bonds pay no cash interest during the term to maturity. The company is “accreting” (gradually increasing) the issue price to maturity value using the bonds' effective interest rate computed on an annual basis. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Determine the effective interest rate on the bonds. 2. Determine the issue price in late 2013 of a single, $1,160 maturity-value bond.

Answer 1

A zero-coupon bond is a bond where the face value is repaid at the time of maturity. This definition assumes a positive time value of money. It does not make periodic interest payments, or have so-called coupons, hence the term zero-coupon bond. When the bond reaches maturity, its investor receives its par value.

Points to be noted:

1) Zero coupan bond is redeemed at face value.

2) It is issued at discount.

3) Ignoring the time value of money an investor income from the bond is the differnce between, Redemption price (face-value) and the issue price (discounted price)