A corporation sells an issue of $20,000,000 of 10%, 20-year bonds to an investme

Question

A corporation sells an issue of $20,000,000 of 10%, 20-year bonds to an investment banking concern for $19,200,000. The corporation's initial disbursements for fees of lawyers, accountants, trustee, and other outlays in connection with the bond issue are $400,000. Each year the disbursements for fees to the trustee and the registrar of the bonds and the clerical and other expenses in connection with the interest payments are $250,000. What is the before- tax cost of this borrowed money expressed as an interest rate? To simplify calculations, assume that the interest is payable annually.

Explanation / Answer

Total money Received by the corporation for bonds = $19200000-400000 = $18800000 Total Money paid each year = $2000000 + $250000 = $2250000 No. of periods = 20 Cost = Yield To Maturity of this bond= 12.06% (Calculated using financial calculator)

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