A. Tesla Corporation needs to raise funds to finance a plant expansion, and it h

Question

A. Tesla Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds to raise the money. The required return on the bonds will be 9 percent. What will these bonds sell for at issuance?

B. You want to have $1.5 million in real dollars in an account when you retire in 40 years. The nominal return on your investment is 11 percent and the inflation rate is 3.8 percent. What real amount must you deposit each year to achieve your goal?

C. Both Bond Sam and Bond Dave have 9 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has has 3 years to maturity, whereas Bond Dave has 20 years to maturity. If interest rates suddenly rise by 2 percent,

C.1 what is the percentage change in the price of Bond Sam?

C.2. Of Bond Dave?

C.3. If rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of Bond Sam be then?

C.4. Of Bond Dave?

Explanation / Answer

A. Tesla Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds to raise the money. The required return on the bonds will be 9 percent. What will these bonds sell for at issuance?

If Face value of Zero coupon Bond = 1000

No of year to maturity = 25

Required Return = 9%

Bonds Sell value for at issuance = 1000/1.09^25

Bonds sell value for at issuance = $ 115.97

These bonds sell for at issuance = Bonds sell value for at issuance/Face Value

These bonds sell for at issuance = 115.97/1000

These bonds sell for at issuance = 11.597% of face value

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