Question

Blackstone Energy is planning to issue two types of 25-year, non-callable bonds to raise a total of $6 million. First 3,000 bonds with a 10% annual coupon rate will be sold at their $1,000 par value to raise $3 million. Second, the original issue discount (OID) bonds, also with a 25-year maturity and a $1,000 par value, will be sold, but these bonds will have a nominal coupon of only 7.65%, also with annual payments. The OID bonds must be offered at a discount (i.e. below par) in order to provide investors with the same yield as the par bonds. How many OID bonds must the firm issue to raise the other $3 million?

Hint: Calculate the price of OID bonds (given the nominal coupon rate and yield of 10%) and divide that price into the $3 million.

Your answer should be between 3150 and 4850.

Answer 1

Solution:-

First we Need to calculate Price of the Second (OID) Bond-

Number of Bonds issued to be collected =

Number of Bonds issued to be collected =

Number of Bonds issued to be collected = 3,814 Bonds

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