Writing Assignment (I like these “no interest” bonds.)
J. R. Chump, president of ProKeeper Industries, is contemplating the issuance of long term debt to finance plant expansion and renovation. J. R. Chump, president of ProKeeper Industries, is contemplating the issuance of long term debt to finance plant expansion and renovation. In the past, his company has issued traditional debt instruments that require regular interest payments and a retirement of the principal on the maturity date. However, he has noticed that several competitors have recently issued bonds that either do not require interest payments or defer interest payments for several years. He has asked you, his chief financial officer, to prepare a short memo adDr.essing the following questions.
1. Why would a company issue bonds that require interest payments if bonds that do not require interest payments are being sold in the open market?
2. If the company were to issue 10 year bonds with a face value of $100,000 and the market rate of interest is 10%, what would be the proceeds from the sale if the bonds were zero interest bonds? What would be the proceeds if the annual interest payments did not begin for 5 years and the stated rate of interest were 10%? What would be the proceeds if the bonds paid interest annually for 10 years at 10%?
3. What factors must a business consider when determining the interest terms associated with long term debt?