Question

CAINE Systems, Inc. is planning to issue two types of bonds in order to raise capital for it's new artificial intelligence software platform:

3,000 bonds at $ 1,000 (par value) paying 10% semiannually for 25 years (non-callable) will raise the first $ 3 Million needed, and second round with OID ( Original Issue Discount ) bonds (same par value, same 25 year maturity) to raise an additional $ 3 Million.

CAINE Systems needs to raise a full $ 6 Million or it will have to layoff employees.

The OID bonds will be sold, but these bonds will have a semiannual coupon of only 6.25%.

In order to attract investors the OID bonds must be offered at below par in order to provide investors with an equal effective yield to maturity as the higher dividend paying par bonds. How many OID bonds must the firm issue to raise $3,000,000? You can ignore flotation costs, and should round your final answer up to a whole number of bonds.

Answer 1