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Short-term securities / After tax cost of debt

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).

Solution Preview

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

Since the ...

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.

$2.19