Adams is planning to issue $520,000 of 6%, five-year bonds payable to borrow for a major expansion. The owner, Shane Adams, asks your advice on some related matters.
Requirements
1. Answer the following questions:
a. At what type of bond price will Adams have total interest expense equal to the cash interest payments?
b. Under which type of bond price will Adams’s total interest expense be greater than the cash interest payments?
c. If the market interest rate is 7%, what type of bond price can Adams expect for the bonds?
2. Compute the price of the bonds if the bonds are issued at 93.
3. How much will Adams pay in interest each year? How much will Adams’s interest expense be for the first year?
