Tillicum Corporation needs to raise funds to finance a plant

Tillicum 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 7 percent.

Solution

Price of a zero-coupon bond is the present value of future cashflows discounted at required rate of return. As far as a zero-coupon bond is concerned, it does not pay any coupon payments, it pays only a lumpsum amount on its maturity.

Value of zero-coupon bond = Face vale / (1+required return)^{time to maturity}

= 1000 / (1+.07)²⁵

= 1000 / 5.4274

= $184.25

note: When no face value is given, it is general practice to take $1,000 as face value.