A firm issues $200 million in straight bonds at par and a coupon rate of 7%.The firm pays fees of 2.5% on the face value of the bonds.What is the net amount of funds that the debt issue will provide for the firm?

Question

Quizplus · Accepted Answer

The face value of the bonds is $200 million and the coupon rate is 7%, which means the firm will pay an annual interest of $14 million (7% of $200 million). 
The fees on the face value of the bonds are 2.5%, which means the firm will pay $5 million (2.5% of $200 million) in fees. 
Therefore, the net amount of funds that the debt issue will provide for the firm is:
$200 million (face value of the bonds) - $5 million (fees) = $195 million.

Hence, option C is the correct answer.

A Firm Issues $200 Million in Straight Bonds at Par