Moon Software Inc. is planning to issue two types of 25-year, noncallable bonds

Question

Moon Software Inc. is planning to issue two types of 25-year, noncallable bonds to raise a total of $6 million, $3 million from each type of bond. First, 3,000 bonds with a 10% semiannual coupon will be sold at their $1,000 par value to raise $3,000,000. These are called par bonds. Second, Original Issue Discount (OID) bonds, also with a 25-year maturity and a $1,000 par value, will be sold, but these bonds will have a semiannual coupon of only 6.75%. The OID bonds must be offered at below par in order to provide investors with the same effective yield as the par bonds. How many OID bonds must the frm issue to raise $3,000,000? Disregard flotation costs, and round your final answer up to a whole number of bonds

Explanation / Answer

Solution:

Coupon rate of secong original isue discount bond = 6.75%, 3.375% semiannual rate

Market rate of interest = 10%, 5% semi annual

Face value of bond = $1,000

Maturity period = 25 years, 50 semiannual period

Nos of bonds to be issued to collect $3,000,000 = $3,000,000 / $703.34 = 4266 bonds

Hence last option is correct.

Computation of bond price - Second original issue Table values are based on: n= 50 i= 5% Cash flow Table Value Amount Present Value Par (Maturity) Value 0.087203727 $1,000.00 $87.20 Interest (Annuity) 18.25592546 $33.75 $616.14 Price of bonds $703.34

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