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Question - Hopkins Company is planning to issue $500,000 of 12%, 15-year bonds payable to borrow for a major expansion. The owner, Frankie Hopkins asks for your advice on some related matters
1. Answer the following questions
a. At what type of bond price will Hopkins Company have total interest expense equal to the cash interest payments?
b. Under which type of bond price will Hopkins Company's total interest expense be greater than the cash interest payments?
c. If the market interest rate is 13%, what type of bond price can Hopkins Company expect for the bonds?
2. Compute the price of the bonds if the bonds are issued at 89.
3. How much will Hopkins Company pay in interest each year? How much will Hopkins Company's interest expense be for the first year? (Assume the straight-line method is used).
Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest. How much control does the Fed have over this longer real rate?
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