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
C. eight-year bond with 5.5% annual interest rate
D. six-year bond with 6.0% annual interest rate

Answer 1

C. Eight-year bond with 5.5% annual interest rate

Step-by-step explanation:

Consider each the interest for each scenario as follows;

A. Three-year bond with 9.5% annual interest rate

To calculate the interest amount, we use the formula below;

I=PRT

where;

I=interest amount

P=principal investment

R=annual interest rate

T=number of years

In our case;

I=unknown

P=$12 million

R=9.5%=9.5/100=0.095

T=3 years

replacing;

I=12×0.095×3=$3.42 million

The interest amount=$3.42 million

B. Four-year bond with 7.25% annual interest rate

To calculate the interest amount, we use the formula below;

I=PRT

Where;

I=unknown

P=$12 million

R=7.25%=7.25/100=0.0725

T=4 years

replacing;

I=12×0.0725×4=$3.48 million

The interest amount=$3.48 million

C. Eight-year bond with 5.5% annual interest rate

To calculate the interest amount, we use the formula below;

I=PRT

Where;

I=unknown

P=$12 million

R=5.5%=5.5/100=0.055

T=8 years

replacing;

I=12×0.055×8=$5.28 million

The interest amount=$5.28 million

D. Six-year bond with 6% annual interest rate

To calculate the interest amount, we use the formula below;

I=PRT

Where;

I=unknown

P=$12 million

R=6%=6/100=0.06

T=6 years

replacing;

I=12×0.06×6=$4.32 million

The interest amount=$4.32 million

Option C. has an interest amount of $5.28 million, there for it will cost them the most in total interest over the life of the bond