Question

Tedman industries is planning to issue $5 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 least amount in total interest over the life of the bond?

O six-year bond with 7.0% annual interest rate
O eight-year bond with 6.5% annual interest rate
O five-year bond with 7.5% annual interest rate
O 10-year bond with 6.0% annual interest rate

Answer 1

The five-year bond with a 7.5% annual interest rate is the most cost-effective option for Tedman Industries, as it results in the lowest total interest payment of $1,875,000 over the life of the bond.

Step-by-step explanation:

The student is asking which of the four bond options would cost Tedman Industries the least amount in total interest over the life of the bond. To determine this, we need to calculate the total interest paid for each option.

• Six-year bond with a 7.0% annual interest rate: $5,000,000 x 0.07 x 6 years = $2,100,000.
• Eight-year bond with a 6.5% annual interest rate: $5,000,000 x 0.065 x 8 years = $2,600,000.
• Five-year bond with a 7.5% annual interest rate: $5,000,000 x 0.075 x 5 years = $1,875,000.
• Ten-year bond with a 6.0% annual interest rate: $5,000,000 x 0.06 x 10 years = $3,000,000.

From the calculations above, the option that would cost Tedman Industries the least in total interest is the five-year bond with a 7.5% annual interest rate, totaling $1,875,000 in interest payments.