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ABC corporation is determining whether to support $125,000 of its permanent current assets with a bank note or short-term bond. The firms bank offers a two-year note where the firm will receive $125,000 and repay $150,000 at the end of two years. The firm has the option to renew the loan at market rates. Alternatively, ABC can sell 9.5 percent coupon bonds with a 2-year maturity and $1,000 par value at a price of $950. How many percentage points lower is the interest rate on the less expensive debt instrument?

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The solution examines permanent asset financing for ABC corporation. How many percentage points lower the interest rate is on the less expensive debt instrument is determined.

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ABC corporation is determining whether to support $125,000 of its permanent current assets with a bank note or short-term bond. The firms bank offers a two-year note where the firm will ...

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Manal Elkhoshkhany, MBA
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  • BA, Ain Shams University, Cairo Egypt
  • MBA, California State University, Sacramento
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