Determine the value of the usdc subsidy on bond

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Reference no: EM132036842

The U.S. Department of Commerce (USDC) has created a new lending program to encourage industrial development in rural areas of Texas and Oklahoma. Under this program companies that build new manufacturing facilities in rural counties with unemployment rates in excess of 9.5 percent will be allowed to issue 30-year bonds having a 3 percent coupon rate at par. Coupon payments on these bonds will occur annually. The USDC plans to purchase the bonds from the issuers at par, reselling the bonds to large insurance companies at a discount (on par) consistent with the current yield on corporate bonds having equivalent risk. The USDC will make no guarantees concerning the prompt payment of principal and interest on these bonds. The manufacturing firms eligible for this financing program have marginal tax rates of 30 percent. Assuming that these bonds make annual coupon payments (only one coupon per year) and that the current yield on bonds of equivalent risk is 7.5 percent, determine the value of the USDC subsidy on a bond with a par value of $1000.

Reference no: EM132036842

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