Business Finance: Zero Coupon Bond Essay

Question:

Discuss about the Business Finance for Zero Coupon Bond.

Answer:

The expected rate of return will be 10.5%. The calculations are shown below:

Calculation of Expected Rate of Return:-

Particulars

Amount

Beta Co-Efficient

A

1.1

Risk Free Rate

B

5%

Market Rate of Return

C

10%

Expected Rate of Return

D=B+[Ax(C-B)]

10.5%

The price of the zero-coupon bond is $613.91 and 2443 nos. of bonds must be issued to raise fund of $1.5 million. The calculations are shown below:

Calculation of Zero Coupon Bond Rate:-

Particulars

Amount

Face Value

A

$1,000

Maturity Period

B

10

Interest Yield Rate

C

5%

Price of Bond

D=A/(1+C)^B

$613.91

Capital Requirement

E

$1,500,000

Bonds to be Issued (in units)

F=E/D

2443

Bibliography:-

Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments, 10e. McGraw-Hill Education

Da, Z., Guo, R. J., & Jagannathan, R. (2012). CAPM for estimating the cost of equity capital: Interpreting the empirical evidence. Journal of Financial Economics, 103(1), 204-220.

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