Question

Reinegar Corporation is planning two new issues of 25-year bonds. Bond Par will be sold at its $1,000 par value, and it will have a 10% semiannual coupon. Bond OID will be an Original Issue Discount bond, and it will also have a 25-year maturity and a $1,000 par value, but its semiannual coupon will be only 7.00%. If both bonds are to provide investors with the same effective yield, how many of the OID bonds must Reinegar issue to raise $3,000,000? Disregard flotation costs, and round your final answer up to a whole number of bonds.

Answers:	a. 4,337
	b. 4,562
	c. 4,132
	d. 4,228
	e. 4,448

Answer 1

Price of Bond OID

Par Value = $1,000

Semi-annual Coupon Amount = $35 [$1,000 x 7% x ½]

Semi-annual Yield to Maturity (YTM) = 5% [10% x ½]

Maturity Years = 50 Years [25 Years x 2]

The Price of the Bond = Present Value of the Coupon payments + Present Value of Face Value

= $35[PVIFA 5%, 50 Years] + $1,000[PVIF 5%, 50 Years]

= [$35 x 18.25593] + [$1,000 x 0.08720]

= $638.96 + $87.20

= $726.16

The Price of Bond OID = $726.16 per Bond

OID bonds must Reinegar issue to raise $3,000,000

Therefore, the OID bonds must Reinegar issue to raise $3,000,000 = Amount need to be raised / Price of Bond OID

= $30,00,000 / $726.16 per Bond

= 4,132 Bonds

“Hence, the OID bonds must Reinegar issue to raise $3,000,000 would be (c). 4,132 Bonds”