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9 August, 12:50

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 6.25%. 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

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  1. 9 August, 13:50
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    4500 bonds

    Explanation:

    In the given information:

    Bond Life - 25 years

    Sale value of bond - $1,000

    Rate:

    - Semi - annual bond - 10%

    - second semi - annual bond - 6%

    Original Issue Discount (OID) value of bond - $1,000

    Bond value of OID - 25 years

    First, we have to calculate total yield and its effectiveness for both type of bond:

    rate = 10%

    The yield of bond = $1000 * 25 * 2 * 10%

    = $5000

    Since the bond is sold, so it would be added while calculating total yield

    So total yield = $5,000 + $1,000

    = $6,000

    Yield effectiveness = Total Yield / Bond price

    = 6000 / 1000

    = 6

    So, the yield effectiveness for bond par is 6 for this type of bond.

    Rate = 6%

    The yield of bond = $1000 * 25 * 2 * 6%

    = $3,000

    Since the bond is sold,

    So total yield = $3,000 + $1,000

    = $4,000

    Yield effectiveness = Total Yield / Bond price

    = 4,000 / 6

    = 666.67

    So, the yield effectiveness for OID bond par is $666.67.

    Now, after calculating the yield effectiveness of OID bond we can calculate the number of bonds for raising by the following formula

    = amount issued / yield effectiveness of OID bond

    = $3,000,000. / $666.67

    = 4500 bonds

    Thus, 4500 bonds is to raise for issuing $3,000,000.
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