Question

Acme Inc. plans to issue six-year, zero-coupon bonds to finance its capital expansion. Acme wants to raise $1 million for the expansion. If the required return on the bonds is 6.0%, how many bonds will the firm have to issue?

Answer 1

Now Acme Inc. Wants 1 Million for its expansion

Required rate of return (r) = 6%

For a zero coupon bond there wont be any intermediate payments, it is issued at discount and repaid at face value, so that the investor gets the difference as discount.

Here Present Value = Future Value / (1+r)^n

n= number of years = 6 years

Present value is the amount of capital that company needs for its expansion = 10,00,000$

Future value is the amount we need to repay after 6 years

10,00,000 = Future Value/(1+0.06)^6

Future Value = 10,00,000*(1.41852) = 1,418,519.1123$

If the face Value of the Instrument is 100$, then company has to issue 14,185 shares(1418519/100)

If the face value of the instrument is 1000$, then company has to issue 1,419 shares (1418519/1000)