Question

Apple recently issued a zero coupon bond. The zero coupon bond has a face value of $1 billion and matures in six years. Assume that when the bonds were sold to the public, the annual market rate of interest was 3 percent. Required:

A) How much did Apple receive when it issued the bonds with a face value of $1 Billion? Note: Round your PV Factors to 5 decimal places. Enter your answer as a whole dollars rounded to nearest whole number

Answer 1

Apple received approximately $837,484,500 from the issuance of zero coupon bonds with a face value of $1 Billion, after discounting them with the present value formula at an annual interest rate of 3% over six years.

Step-by-step explanation:

To calculate how much Apple received when it issued the zero coupon bonds with a face value of $1 Billion at an annual market interest rate of 3%, we need to find the present value of the bonds. A zero coupon bond pays no interest, and its value is solely determined by the principle returned at maturity. The present value of a bond is calculated using the formula:

PV = FV / (1 + r)^n

Where:

• PV = Present Value of the bond
• FV = Face Value of the bond
• r = Annual market rate of interest
• n = Number of years until maturity

Substituting the given values:

PV = $1 Billion / (1 + 0.03)^6 = $1 Billion / (1.19405) ≈ $837,484,500

Therefore, Apple would have received approximately $837,484,500 when it issued the zero coupon bonds.