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 7%. Assume interest is compounded semi-annually.
a. What will these bonds sell for at issuance?
b. It is one year later after issuance, if the required yield is still 7% what is the value of the bonds?
c. This is a zero coupon bond so there is no actual interest payments to investors. Nonetheless, during the first year, can Tesla deduct any interest expenses, if so how much?
d. Will the investor owe any taxes to the IRS for owning the bond for one year?
e. If the investor decides to sell the bond one year after issuance, and interest rates for such bonds at that point stand at 6%, is there a capital gain or loss? How much is the capital gain or loss?