Question

Which of the following companies will have the lowest cost of borrowing, assuming all four companies issued $500,000 in six-year bonds with a contractual interest rate of 8 percent?

A : Company 2, which sold its bonds at 97
B : Company 1, which sold its bonds at 92
C : Company 4, which sold its bonds at 107
D : Company 3, which sold its bonds at 102

Answer 1

The lowest cost of borrowing would be for Company 4, which sold its bonds at 107. Therefore, the correct option is C.

Step-by-step explanation:

When considering the cost of borrowing, the lower the price of the bonds, the lower the cost of borrowing for the company. The price of the bond is inversely related to the interest rate in the market. If the interest rate in the market is higher than the contractual interest rate, the price of the bond will be lower than the face value. Conversely, if the interest rate in the market is lower than the contractual interest rate, the price of the bond will be higher than the face value.

In this case, the bond issued by Company 4, which was sold at 107, has the highest price among the four options and therefore will have the lowest cost of borrowing. Therefore, the correct answer is option C: Company 4.