Company A needs to raise 50million to build a new power station. The aim is to begin construction on the power station immediately although it will be 10 years before it begins producing electricity. It has decided to fund the project by issuing bonds, but is unsure of what type of bonds to issue. It has narrowed the choice to:

a. 10 year bond, face value 100, coupon rate 12%

b. 20 year bond, face value 100, coupon rate 3% The required rate of return on either bond would be 6%.

Calculate the number of each bond the firm would have to issue and make a recommendation as to which bond you think the company should use.