(L.OBJ. 5) Determining bond prices [5—10 min]
Havens is planning to issue Long-term bonds payable to borrow for a major expansion. The chief executive, Richie Havens, asks your advice on some related matters.
Requirement
1. Answer the following questions:
a. At what type of bond price will Havens have total interest expense equal to the cash interest payments?
b. Under which type of bond price will Havens total interest expense be greater than the cash interest payments?
c. The stated interest rate on the bonds is 7%, and the market interest rate is 8%. What type of bond price can Havens expect for the bonds?
d. Havens could rake the stated interest rate on the bonds to 9% (market rate is 8%). In that case, what type of price can Havens expect for the bonds?
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