LOY OF TOY

2-1 What effect do you think each of the following items should have on the interest rate that a firm must pay on a new issue of long-term debt? Indicate whether each factor would tend to raise, lower, or have an indeterminate effect on the interest rate, and then explain why.

a. The firm uses bonds rather than a term loan.

If the firm uses bonds rather than a term loan, the interest will be determined by the coupon rate. The coupon rate represents the total interest paid each year that is stated as a percentage of the bonds face value. By doing this, more interest can be accrued annually each year. Although, the firm wouldn’t have the speed, flexibility, and low issuance cost of a term loan and the interest rates would be indeterminate.

b. The firm uses debentures rather than first mortgage bonds.

By the firm using debentures the interest rates would be lower than using a mortgage bond. Because a debenture is an unsecured bon...