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# Term Loan Versus Coupon Bond

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Bingo 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 rate. Alternatively, Bingo 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?

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#### Solution Preview

The first loan is a term loan. That is, the borrower receives a lump-sum today and pays a lump-sum (which includes principal and interest) at some future date. It is analogous ...

#### Solution Summary

Using an Excel spreadsheet, this solution illustrates how to determine the effective interest rate of a coupon bond sold at a discount and how to compare that cost to the interest cost of a bank loan issued at an original issue discount (i.e., receive a lump sum now and repay a greater lump sum later).

\$2.19