Castelda company issues zero coupon bonds which mature in 30 years. These bonds can be bought for $999.38 and then pay no annual interest payments, only $100,000 at maturity. What is the annual percentage cost of these bonds to the issuing company? (Do not round intermediate calculations. Round your final answer to two decimal places of percentage.)

Question

Business

Krish Andrade

10 July, 00:32

Castelda company issues zero coupon bonds which mature in 30 years. These bonds can be bought for $999.38 and then pay no annual interest payments, only $100,000 at maturity. What is the annual percentage cost of these bonds to the issuing company? (Do not round intermediate calculations. Round your final answer to two decimal places of percentage.)

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Answers (1)

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Keith Fuller · Answer 1

16.59%

Explanation:

We are given the present value of the bonds, their future value and the time, we need to calculate the rate:

FV = PV (1 + rate) ⁿ

FV = 100,000 PV = 999.38 n = 30

100,000 = 999.38 (1 + rate) ³⁰

(1 + rate) ³⁰ = 100,000 / 999.38 = 100.062

1 + rate = ³⁰√100.062 = 1.1659

rate = 1.1659 - 1 = 0.1659 or 16.59%