Impact of Two Bond Alternatives
Yung Chong Company wants to issue 100 bonds, $1,000 face value, in January. The bonds will have a ten-year life and pay interest annually. The market rate of interest on January 1 will be 9%. Yung Chong is considering two alternative bond issues: (a) bonds with a face rate of 8% and (b) bonds with a face rate of 10%.
Required:
1. Could the company save money by issuing bonds with an 8% face rate? If it chooses alterna- tive (a), what would be the interest cost as a percentage?
2. Could the company benefit by issuing bonds with a 10% face rate? If it chooses alternative (b), what would be the interest cost as a percentage?