Question

On 2/25/2016 JNJ issued a bond with coupon of 2.45%, face value of $2 Billion, with maturity set for 3/1/2026. (a) Based on JNJ’s 10-K for fiscal 2016 (12-month period ending on 1/1/2017), what was the amount raised by JNJ when the bonds were issued? (b) Were these bonds issued at a discount or premium? (c) How much was the discount or premium? (From here on by the term “JNJ’s bonds” I mean these bonds only.)

Answer 1

Issuing bonds is one way for companies to raise money. A bond functions as a loan between an investor and a corporation. The investor agrees to give the corporation a certain amount of money for a specific period of time. In exchange, the investor receives periodic interest payments. When the bond reaches its maturity date, the company repays the investor.

Most individual bonds have five features when they are issued: issue size, issue date, maturity date, maturity value, and coupon. Once bonds are issued the sixth feature appears—yield to maturity, which becomes the most important figure for estimating the total yield an investor will receive by the time the bond matures.

Issue Size - $2 Billion (F.Value)

Issue date - 2/25/2016

Maturity date - 3/1/2026

Maturity Value - $2 Billion (F.Value)

Coupon rate - 2.45%

a)

Amount raised through issuance of 2.45% Bonds is $1.989 Billions.

b)

As the Face Value of the 2.45% bonds is $2 Billions and the proceeds through the issue of bonds is $1.989 Billions, Therefore, the bonds issued at a discount.

c)

Discount = $ (2 - 1.989)

= $11 Millions