Posted: December 7th, 2021
The U.S. Department of Commerce (USDC) has created a new lending program
The U.S. Department of Commerce (USDC) has created a new lending program to encourageindustrial development in rural areas of Texas and Oklahoma. Under this programcompanies that build new manufacturing facilities in rural counties with unemployment ratesin excess of9.5percent will be allowed to issue15-year bonds having a4percent couponrate at par. Coupon payments on these bonds will occur annually. TheUSDCplans topurchase the bonds from the issuers at par, reselling the bonds to large insurance companiesat a discount (on par) consistent with the current yield on corporate bonds having equivalentrisk. TheUSDCwill make no guarantees concerning the prompt payment of principal andinterest on these bonds. The manufacturing firms eligible for this financing program havemarginal tax rates of30percent. Assuming that these bonds make annual coupon payments(only one coupon per year) and that the current yield on bonds of equivalent risk is7.0percent, determine the value of theUSDCsubsidy on a bond with a par value of$1000
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