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. Assume semiannual compounding.
a. What will these bonds sell for at issuance? (Round your answer to 2 decimal places. (e.g., 32.16))
Issue price $
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 round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
Interest deduction
First year $
Last year $
c. Repeat part (b) using the straight-line method for the interest deduction. (Round your answer to 2 decimal places. (e.g., 32.16))
Interest deduction $
d. Based on your answers in (b) and (c), which interest deduction method would Pangaea Corporation prefer?
IRS amortization rule
Straight-line method