A firm issues $500 million in straight bonds at par and a coupon rate of 5%.The firm pays fees of 3% on the face value of the bonds.What is the the net amount of funds that the debt issue will provide for the firm?

Question

Quizplus · Accepted Answer

The net amount of funds that the debt issue will provide for the firm is calculated as follows:
Amount received from bondholders = Face value of bonds * Coupon rate 
= $500 million * 5% 
= $25 million

Fees paid by the firm = Face value of bonds * Fees 
= $500 million * 3% 
= $15 million

Net amount received = Amount received - Fees paid 
= $25 million - $15 million 
= $10 million

Therefore, the net amount of funds that the debt issue will provide for the firm is $485 million (i.e., the face value of bonds minus fees paid).

A Firm Issues $500 Million in Straight Bonds at Par