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Short-term securities / After tax cost of debt

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1. If the Federal Reserve sells $40 billion of short-term U. S. Treasury securities to the public, other things held constant, what would be the most likely effect on short-term securities prices and interest rates?
a. Prices and interest rates will both rise.
b. Prices will rise and interest rates will decline.
c. There is no reason to expect a change in either prices or interest rates.
d. Prices will decline and interest rates will rise.
e. Prices and interest rates will both decline.

2. Peterson Co is planning a zero coupon bond issue that has a par value of #1,000 and matures in 2 years. The bonds will be be sold today at a price of $726.45. If the firm's marginal tax rate is 40%, what is the annual after-tax debt to the company on this issue? (Please show formula in Excel).

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Solution Summary

The solution has two questions - one relating to impact of a sale of short term securities and the second one relating to calculation of after tax cost of debt.

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1. d. Prices will decline and interest rates will rise.

Since the ...

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