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September 16, 2021 at 8:57 pm #635848HamzaYusuf
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I have few question relating to a question asked long time back ago called Bar Co (Dec 11).
1) Bar Co wants to buy back the bonds to pay less interest in the future so that they can have more dividends to pay their shareholders. Bar Co had issued 1.25m units of bonds with a nominal value of $100 each. Therefore, the total value of debt redeem on nominal value is $125m which Bar Co has to be paid to its debtholders.
2) To cancel the bond Bar Co has to repay the nominal value $100 per each bonds on maturity date which Bar Co promised to its debtholders BUT Bar Co is not redeeming all the debt of $125m instead they are redeeming only part of the Bonds debt.
3) Since Bar Co has raised $90m from rights issue but why Bar Co has raised $90m even though the total debt of the company is $125m which they have to return to its bondholders?
4) Why the nominal value of bonds redeemed be less than $90m cash that we raised from rights issue? Is the $90m cash from rights issue is based on market value so that we divide it by MV of bond and multiply by its nominal value to get the Total Nominal value of redeeming bonds?
5) If Bar Co has raised $90m from rights issue then it is the market value of cash raised by rights issue but its nominal value is $80m which is used for redeeming bonds. The extra $10m is the increase caused by market value being higher than nominal value?
[# of Bonds = ($90m / $112·50) = 0.8m bonds]
[nominal value of bonds redeem = (0.8m x $100) = $80m]
We calculate this to see whether how many UNITS of Bond has to be redeemed.
Sorry to ask you lengthy question. I hope you do not mind answer this.September 17, 2021 at 8:40 am #635874John MoffatKeymaster
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The are no repaying all of the debt. As the question states, they are using the $90 to repay some of the debt.
Any debt repaid will be repaid at the market value. The nominal value of 1 unit is $100, and the market value of 1 unit is $112.50.
Therefore the $90,000 will repay 90,000/112.50 = 800 units. The total nominal value of these units is 800 x $100 = $80,000, and therefore interest will be saved on $80,000.
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