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 net amount of funds that the debt issue will provide for the firm?

Question

Quizplus · Accepted Answer

The bond issue will provide the firm with:
$500 million (face value of bonds) * 0.05 (coupon rate) = $25 million per year in interest payments
The fees on the bond issue will cost the firm:
$500 million (face value of bonds) * 0.03 (fees) = $15 million
Therefore, the net amount of funds the debt issue will provide for the firm is:
$500 million (face value of bonds) - $15 million (fees) = $485 million.

A Firm Issues $500 Million in Straight Bonds at Par