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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?

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91624351

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