When you present your thoughts to Sue she thinks about your input and decides to invite in an investment banker to give her additional guidance.

She invites you to the meeting and the investment banker presents several options.

The first option is to issue bonds and the second option is to call in your outstanding bonds and obtain a loan from a bank instead.

Scenario Steps to Completion

1. Option one is for Stirm to issue debt in the form of bonds to fund recessionary periods resulting in order and thus revenue shortfalls. If the company issues new bonds bearing a 6% coupon, payable semiannually and the bond matures in 8 years and has a $100,000 face value. Currently, the bond sells at par.

Please compute the bond prices considering that there will be no change in the interest rates for the life of the bond.

What happens if interest rates rise or fall during this 8 year period?

Scenario Steps to Completion

2. Another option for financing is to call in the outstanding bonds you have issued and obtain a loan with more favorable terms than the bonds you would issue. Presently, the company has a 6% coupon bond that matures in 11 years. The bond pays interest semiannually.

What is the market price of a $1,000 face value bond if the current rate of interest is 12.9%?

How much will it cost the company to call in 1,000 of these bonds? Is it worth pursuing this strategy if your interest rate on a loan is 13%?