Problem:
Pangaea 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.
Required:
Question 1: What will these bonds sell for at issuance?
Question 2: Using the IRS amortization rule, what interest deduction can the company take on these bonds in the first year? In the last year?
Question 3: Repeat part (b) using the straight-line method for the interest deduction.
Note: Show supporting computations in good form.