The business where you work is considering issuing bonds to finance a major expansion. Your boss has just come from a lengthy meeting regarding the bonds, including the interest rate the bonds should carry. This has irritated your boss, who feels that the interest rate to use is obvious—the lowest one possible. This would yield the lowest interest expense to borrow the money. It seems stupid to pay big fees to financial advisors and lawyers when the question is so simple.

Write a report to your boss explaining how the issue price of the bonds (the net amount borrowed) is affected by the stated interest rate on the bonds. Include an explanation of how interest costs consist of more than just periodic interest payments.