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A business can take out a one year loan for $250,000 loan at an interest rate of 7%, or the business can issue a bond that se
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Answer #1

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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