Final answer:
The total borrowing cost for a bond issued at a premium is calculated by taking the total periodic interest payments and subtracting the premium amount. This accounts for the additional cash received upfront and represents the net cost of borrowing over the life of the bond. Option c is the correct answer.
Step-by-step explanation:
The total borrowing cost for a bond issued at a premium includes not just the periodic interest payments but also takes the premium into account. To calculate this, one starts with the total of the periodic interest payments made over the life of the bond. However, since the bond was issued at a premium, the amount of the premium is actually an additional amount the issuer receives beyond the face value of the bond. This means that the amount of the premium needs to be subtracted from the total interest payments to calculate the net cost of borrowing.
Looking at a simple two-year bond as an example, if it was issued for $3,000 at an 8% interest rate, the annual interest payment would be $240. Using the present value formula, the value of these payments would be calculated according to the prevailing discount rate. If interest rates rise, causing the discount rate to increase, the present value of the future payments would be lower, indicating that the cost of borrowing is sensitive to changes in market interest rates.
With this understanding and considering the options provided, the correct option for the total borrowing cost for a bond issued at a premium would be (c) the total of the periodic interest payments less the premium.