Question

Sincere Stationary Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with a 12 percent annual coupon rate and a 10 year maturity. If floatation costs are 10.5 percent of the market price, how many bonds will the firm have to issue to receive the needed funds?

Give an example of why a company like Sincere Stationary Corporation would issue debt at 12 percent interest in today’s interest rate environment?

Answer 1

Net proceeds per bond = issue price - flotation cost

Net proceeds per bond = $1,000 - ($1,000 * 10.5%)  

Net proceeds per bond = $895

Number of bonds to issue = total amount to raise / net proceeds per bond

Number of bonds to issue = $500,000 / $895

Number of bonds to issue = 558.66

This is roundeed off to 559, since fractional bonds cannot be issued.

Number of bonds to issue = 559

A company like Sincere Stationary Corporation may issue debt at 12 percent interest in today’s interest rate environment because :

• The spreads on corporate bonds are higher due to the uncertainty in global markets
• The company may have a lower credit rating, due to which the return required by the bond investors is higher