Bill Gordon, the president of All-State University, is considering a bond issue to raise $70,000,000 to build a parking garage. Mr. Gordon notes that long-term Treasury bonds yield 3% which he thinks is a good loan rate. Before proceeding with the bond issue, however, Mr. Gordon wants to know more about it. Specifically, he wonders what the annual interest payments would be on the bonds as that will have an impact on student fees.
You are the CFO at All-State University. Write a memo to Mr. Gordon explaining what the interest payments on $70,000,000 30-year bond issue would be if the bonds were issued at 3% yield. Also, 1) explain in your memo why All-State University would probably not be able to issue the bonds at 3% and 2) provide a bond amortization chart assuming the University would issue a 20-year 6% bond with a market yield of 5%.
