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A company has decided to issue 20-year zero-coupon bonds to raise funds. The required return on...

A company has decided to issue 20-year zero-coupon bonds to raise funds. The required return on the bonds will be 6% and face value will be $1,000. What will these bonds sell for at issuance?

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Answer #1
Computation of Issue Price of Zero Coupon Bond:
Time to Maturity = 20 Years
Face Value = $ 1,000
Required Return = 6%
Issue Price = Present Value of Future Expected Payments
Issue Price = Present Value of Redemption Value(in case of a Zero Coupon Bond, as no Coupon Payments)
Issue Price = $1,000 * PV(6%, 20 Years)
Issue Price = $1,000 / (1+0.06)^20
Issue Price = $1,000 / (1.06^20)
Issue Price = $1,000 / 3.2071
Issue Price = $ 311.80
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