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Interest on Zeroes:
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 8 percent. Assume semiannual compounding.
Required:
a. What will these bonds sell for at issuance? (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16)) Price of the bonds $________
b. Using the IRS amortization rule, what interest deduction can the company take on these bonds in the first year? In the last year?(Do not include the dollar signs ($).Round your answers to 2 decimal places. (e.g., 32.16))
First year interest deduction $________ Last year interest deduction $_______
c. Repeat part (b) using the straight-line method for the interest deduction. (Do not include the dollar sign ($).Round your answer to 2 decimal places. (e.g., 32.16))
Annual interest deduction $_______
d. Based on your answers in (b) and (c), which interest deduction method would Tesla Corporation prefer? (i) Straight - Line method ; (ii) Amortization method
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