50.1K

Verified Solution

Link Copied!

At the end of 2018, EQR, Ltd. issued zero-coupon bonds that mature in 2038. The face value of the bonds was $1,801 million, and they sold for $1,099 million on the issue date. The effective market interest rate was 2.5% on that date. At the end of 2025, RQM repurchased $257 million in face value of the notes for a purchase price of $174 million, resulting in a gain on the early extinguishment of debt.

Review what you have learned about bonds as well as the explanation of zero coupon bonds on p. 537 of your text, and answer the following questions, expressing all numbers in millions (for example, the face amount of the notes is $1,801). Please answer in complete sentences and show your calculations for numerical answers and journal entries. Please do not use decimals in any of your answers. Round to millions.

A. Interest expense is deductible on the corporate tax return. Assuming a corporate tax rate of 21% in 2019, how much did EQR save in taxes by deducting the interest expense? What was the after-tax interest cost in 2019?

B. Why might company managers choose to issue zero-coupon bonds instead of interest-bearing bonds? Why might they decide to repurchase some of the bonds before the maturity date? Be sure to consider whether management may chose to repurchase when interest rate are increasing or decreasing and explain why.

Answer & Explanation Solved by verified expert

See Answer