Basketball Games, Inc., with the help of its investment bank recently issued $5 million of new debt. The offer price (and face value) on the debt was $1,000 per bond and the underwriter's spread was 6 percent of the gross proceeds. What is the amount of capital funding Basketball Games raised through this debt offering?

Question

Quizplus · Accepted Answer

Basketball Games, Inc. issued $5 million of new debt. The underwriter's spread was 6 percent of the gross proceeds, which means the company would receive 94% (100% - 6%) of the gross proceeds. Therefore, the amount of capital funding raised is 94% of $5 million, which equals $4.7 million.