With regard to debt securities, which of the following statements is correct?
A)Provided the issuer is not in the business of lending money, issuing debt securities at a premium will normally reduce the after-tax cost of financing for the issuer.
B)Provided the issuer is not in the business of lending money, issuing debt securities at a premium will normally increase the after-tax cost of financing for the issuer.
C)Issuing debt securities at a discount results in the borrowing corporation receiving funds above the stated price.
D)Issuing debt securities at a premium results in the borrowing corporation receiving funds below the stated price.

Question

Quizplus · Accepted Answer

Issuing debt securities at a premium will normally reduce the after-tax cost of financing for the issuer because the premium received is not subject to interest expense deductions for tax purposes. Therefore, the after-tax cost of financing is lower. Option B is incorrect, as issuing debt securities at a premium would not increase the after-tax cost of financing. Option C is incorrect because issuing debt securities at a discount results in the borrowing corporation receiving funds below the stated price. Option D is also incorrect because issuing debt securities at a premium results in the borrowing corporation receiving funds above the stated price.

With Regard to Debt Securities, Which of the Following Statements