A Bank Is Going to Issue $10,000,000 in 5-Year Par

question 11

Multiple Choice

A bank is going to issue $10,000,000 in 5-year par value bonds that pay a 5% annual coupon.The bank must pay .7% of the face value in floatation costs.What is the bank's effective cost of borrowing?

• A)5.0%
• B)5.2%
• C)5.7%
• D)6.2%
• E)7.5%

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Definitions:

Acid-Test Ratio

A financial metric that measures a company's ability to pay off its current liabilities with its quick assets such as cash, marketable securities, and accounts receivable.

Quick Ratio

A metric to evaluate a company's short-term liquidity position, calculated by dividing liquid assets by current liabilities.

Working Capital

The difference between a company's current assets and current liabilities, indicating the liquidity of the business.

Acid-Test Ratio

The acid-test ratio, also known as the quick ratio, measures a company's ability to pay its short-term liabilities with its most liquid assets.