A company has a long-term debt of $1,000,000 with a 7% interest rate and a maturity of 10 years. The company wants to make a prepayment of $200,000 at the end of year 5. The company can invest the $200,000 in a bond that pays 6% interest, compounded annually, for the remaining 5 years. Should the company make the prepayment or invest the $200,000? Show all calculations and explain your answer.

Answer rating: 100% (QA)

The detailed answer for the above question is provided below To answer this question we need to compare the present value of the cash flows associated with the two options making the prepayment or inv... View the full answer