Several years ago, JCPenney Company issued bonds for 33.24 (percent of face value), with a face value of $200 million and a stated interest rate of zero, which matured eight years later. That same year, Martin Marietta, Northwest Industries, and Alcoa also issued bonds with stated interest rates of zero. REQUIRED:
a. Why would an investor purchase a bond with a stated interest rate of zero?
b. Compute the effective interest rate on the bond issuance.
c. In terms of its cash flows, explain why a company might wish to issue bonds with a stated interest rate of zero.
d. At what price would the bonds have been issued if the stated interest rate had been 5 percent? 18 percent? Assume that interest payments would be made annually.