7A-9. U.S. Delay Corporation, a subsidiary of the Postal Service, must decide whether to issue zero coupon bonds or quarterly payment bonds to fund construction of new facilities. The $1,000 par value quarterly payment bonds would sell at $795.54, have a 10 percent annual coupon r

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 9P

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Question

7A-9. U.S. Delay Corporation, a subsidiary of the Postal Service, must
decide whether to issue zero coupon bonds or quarterly payment bonds
to fund construction of new facilities. The $1,000 par value
quarterly payment bonds would sell at $795.54, have a 10 percent
annual coupon rate, and mature in 10 years. At what price would the
zero coupon bonds with a maturity of 10 years have to sell to earn the
same effective annual rate as the quarterly payment bonds?
a. $274.50
b. $271.99
c. $198.89
d. $257.52
e. $254.84

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U.S. Delay Corporation, a subsidiary of the postal service, must decide whether to issue zero coupon bonds or quarterly payment bonds to fund construction of new facilities. The $1,000 par value quarterly payment bonds would sell at $795.54, have a 4.50% coupon rate, and mature in 10 years. At what price would the zero coupon bonds with a maturity of 10 years have to sell to earn the same effective annual rate (or bond yield) as the quarterly payment bonds?
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