Question

Question 20 5 pts 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, 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 7.10%, also with annual payments. The OID bonds must be offered at a discount (ie., 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? You may round your answer up or down to a whole number of bonds. 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, with no special characters.

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

W @ E C Ax 3 ENG, 03:26 16-03-2020 ... o X DB791 X fc CW CX CY BLACKSTONE CZ DA DB DC DD DE DE DG CA 771 772 773 774 775 THE FIRST BOND HAS COUPON RATE OF 10%, SOLD AT PAR, SO YTM = 10% THE SECOND BOND HAS COUPON RATE OF 7.10%, BUT ITS YIELD SHOULD BE EQUAL TO FIRST BOND 776 THAT IS, WE HAVE TO CALCULATE PRESENT VALUE OF BOND TAKING YTM =10%(ANNUAL) 777 YEARS 778 779 25 1000 FV 780 781 782 COUPON COUPON($) PERIODS IN A YEAR NO OF PERIODS 7.10% 71 1 783 25 784 785 786 YTM 10.00% 736.77 [=PV(CZ785,C2783,-CZ781,-CZ779)] PV 787 ANSWER SO NO OF OID BONDS TO BE ISSUED = 3000000/736.77 = 4072 788 789 790 791 792 793 1 YIELD SPOT | AFN BANKING NOTE Sheet2 51 53 | CLEAN PRICE 510 BIDDING, UNDERWRITING EUAC AW LIFE | LP, IP, MRP, INFLATION WARR ... Đ : 0