Wicker Corporation is determining whether to support $100,000 of its permanent current assets with a bank note or a short-term bond.The firm's bank offers a two-year note where the firm will receive $100,000 and repay $118,810 at the end of two years.The firm has the option to renew the loan at market rates.As an alternative,the firm can sell its own 8.5 percent annual coupon bonds,with $1,000 face value and 2-year maturity,at a price of $973.97.Comparing the cost of the two alternatives,how many percentage points lower is the interest rate on the less expensive debt instrument?
A) 0%;the rates are equal.
B) 1.2%
C) 1.0%
D) 1.8%
E) 0.6%

Question

Quizplus · Accepted Answer

The bank note has an effective interest rate of approximately 9% (calculated as (118,810 - 100,000) / 100,000 over 2 years). The bond has a yield to maturity of approximately 8% (calculated using the bond price and coupon rate). The bond is 1 percentage point less expensive.

Wicker Corporation Is Determining Whether to Support $100,000 of Its