A firm issues $200 million in straight bonds at an original issue discount of 1.50% and a coupon rate of 4.5%. The firm pays fees of 2% on the face value of the bonds. The net amount of funds that the debt issue will provide for the firm is closest to which of the following?

Question

Quizplus · Accepted Answer

The face value of the bonds is $200 million. The original issue discount is 1.50%, which means that the bonds are issued for 98.50% of their face value.
The net amount of funds that the debt issue will provide for the firm can be calculated as follows:
Net amount = Face value * (1 - discount rate) - fees
Net amount = $200,000,000 * (1 - 0.015) - 2% * $200,000,000
Net amount = $200,000,000 * 0.985 - $4,000,000
Net amount = $197,000,000 - $4,000,000
Net amount = $193,000,000
Therefore, the net amount of funds that the debt issue will provide for the firm is closest to $193,000,000, which is option C.

A Firm Issues $200 Million in Straight Bonds at an Original