Homework Answers
We have to calculate the interest which the business has to pay in both cases.
Interest Payment on one year loan with the interest rate of 7 percent= 0.07×250000= $17500
The difference between the price of bond and the payout which the firm pays to bondholder is the implicit interest which the firm pays to bondholder which is= 264000–250000= $14000
Interest which the Business has to pay on bond is less than the Interest which the business has to pay on the loan.
Therefore, for the business, cheaper option is the bond.
Hence, second option is correct
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