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# How many percentage points lower is the interest rate on the less expensive debt instrument?

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ABC Corporation is determining whether to support \$150,000 of its permanent current assets with a bank note or a short-term bond. The firm's bank offers a two-year note where the firm will receive \$150,000 and repay \$175,000 at the end of two years. The firm has the option to renew the loan at market rates.l Alternatively, ABC can sell 8.5% coupon bonds with a 2-year maturity and \$1,000 par value at a price of \$973.97. How many percentage points lower is the interest rate on the less expensive debt instrument?

#### Solution Preview

We need to find out the interest rate on the two options.

Option 1 - Bank note - Here the amount borrowed in 150,000 and the amount repaid is 175,000 in 2 years. The difference is the interest that is paid. So over 2 years we pay 25,000 as interest. The compound interest formula is:
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#### Solution Summary

The solution explains how to calculate the interest rate on debt, with step by step calculations and the answer.

\$2.19