Straight-line method for the interest deduction

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Reference no: EM131963461

Imagination Dragons Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 30-year zero coupon bonds with a par value of $1,000 each to raise the money. The required return on the bonds will be 10 percent. Assume semiannual compounding periods.

a. What will these bonds sell for at issuance? (Do not round intermediate calculations and 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 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. (Do not round intermediate calculations and 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 the company prefer?

IRS amortization rule

Straight-line method

Reference no: EM131963461

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