Nooks is planning to issue $470,000 of 5%, 10-year bonds payable to borrow for a major expansion. The owner, Simon Nooks, asks your advice on some related matters.
Requirements
1. Answer the following questions:
a. At what type of bond price will Nooks have total interest expense equal to the cash interest payments?
b. Under which type of bond price will Nooks’ total interest expense be greater than the cash interest payments?
c. If the market interest rate is 7%, what type of bond price can Nooks expect for the bonds?
2. Compute the price of the bonds if the bonds are issued at 86.
3. How much will Nooks pay in interest each year? How much will Nooks’ interest expense be for the first year?