Explain why company managers might choose to issue zero...

Explain why company managers might choose to issue zero-coupon bonds instead of interest- bearing bonds or coupon bonds instead of zero- coupon bonds? Give pros and cons of each. Be sure to consider the situation from the bond issuer’s viewpoint and not the bondholder.

Transcript

00:01 The objective for this task is to determine the best option for the investor.

00:11 And this is for the bonds.

00:14 So to get started, let's focus on the yield to maturity formula, because we're going to need this to calculate both bonds to see which one would be the best option.

00:25 So the yield to maturity formula is the annual interest plus the par value.

00:38 Which is the face value, minus the market value, divided by the number of years to maturity.

00:50 And then we divide that by the par value plus market price divided by two.

01:08 So let's start with option a.

01:16 Option a is the zero coupon bond.

01:19 So this one, we're going to plug everything into the formula.

01:22 We know that this one does not have an annual interest.

01:26 So we're going to have annual interest of zero plus the par value, which we know is the face value of the bone, which is 1 ,000, minus the market price of 860.

01:40 And we say divided by two because that's the number of years to maturity.

01:46 So i just do this here for consistency.

01:49 And then we're going to divide this by the par value plus the market value divided by two.

01:58 So we bring this down.

02:04 We have 0 plus 1 ,000 minus 860 divided by 2, which is going to give us 140 divided by 2, divided by 1 ,000 plus 860 divided by 2.

02:21 So that's going to be 1 ,860 divided by 2.

02:29 So we take this down and further simplify it.

02:32 This gives us 70.

02:35 Divided by 930 and 70 divided by 930 gives us 0 .07353 or 7 .53%...