Question

Bronson Manufacturing is planning to issue $12 million in bonds. Based on a poll of potential investors, they have the highest chance of raising the funds they need with one of four sets of bond characteristics. Which option would cost them the MOST in total interest over the life of the bond? A.three-year bond with 9.5% annual interest rate B.four-year bond with 7.25% annual interest rate This is correct answer : C.eight-year bond with 5.5% annual interest rate D. six-year bond with 6.0% annual interest rate

Answer 1

Answer:

Option A

Total interest = 9.5% x $1,000 x  3 years =  $285

Option  B      

total interest  =  7.25% x $1,000 x 4 years = $290

Option C

Total interest = 5.5% x $1,000 x 8 years = $440

Option D

Total interest = 6% x $1,000 x 6 years = $360

Option c will cost the company the most in total interest over the life of the bond

Explanation:

In this case. the total interest over the life of the bonds is calculated. The total interest is a function of interest rate, par value of the bonds and number of years to maturity. A par value of $1,000 is assumed in this respect.