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 coupn of only 6.25%. 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 firm issue to raise $3,000,000? Disregard flotation costs, and round your final answer up to a whole number of bonds

Explanation / Answer

Present value of 3,000,000 due in 25 years at 10%,interest payable semiannually(i=10%/2=5%; n=25*2=50) $3,000,000*0.0872=262,600 Present value of interest payable semiannualy for 25 years at 10% annually 3,000,000 *6.25%*6/12=$93,750 interest payable 93,750*18,25593(present value factor of annuity due i=5%,n=50)=1,711,493.40 Proceeds from sale of bonds = 262,600+1,711,493.40=1,973,093.40 Discount on Bonds Payable = 3,000,000- 1,973,093.40=1,026,906.40 Cash 1,973,093.40 debit Discount on Bonds Payable 1,026,906.40 debit Bonds Payable 3,000,000 credit To raise 3,000,000 right away 3,000,000/1000=3000 3000*X=1,973,093 X=1,973,093/3000=657.70 $657/bond*N(number of bonds)=3,000,000 N=3,000,000/657=4,566 bonds to issue to raise $3,000,000

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