Briefly answer each of the following questions about bond issue costs: 1. What type of cost is included in bond issue costs? 2. As a percentage of a bond issue, how significant are bond issue costs? 3. What is the impact of bond issue costs on a bond issue and the amount of interest expense a company records over the life of the bond?
1. Bond issue costs often include the fees of underwriters, whom corporations hire to take care of the details of marketing a bond issue.
2. Bond issue costs can amount to as much as 5% of a bond issue.
3. Bond issue costs decrease the amount of money a company receives from a bond issue. Therefore, they have the effect of raising the discount or lowering the premium on the issue and will increase the amount of interest expense a company would otherwise record on the bonds.
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