Interest on Zeroes [LO2] Imagination Dragons Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds with a par value of $1,000 each to raise the money. The required return on the bonds will be 5.8 percent. Assume semiannual compounding periods.
a. What will these bonds sell for at issuance?
b. Using the IRS amortization rule, what interest deduction can the company take on these bonds in the first year? In the last year?
c. Repeat part (b) using the straight-line method for the interest deduction.
d. Based on your answers in (b) and (c), which interest deduction method would the company prefer? Why?