The size of the national debt concerns many people, but it continues to grow. Let's look at three possible ways to respond 1. Pay interest only each year with the principal unchanged. 2. Pay neither principal nor interest so the interest compounds annually. (This is basically the situation in many recent years.) 3. Pay off the principal and interest on a regular basis. Assume a debt of $10 billion, an interest rate of 7%, and a 30-year period. Look at the total obligation resulting from each of these three strategies. By total obligation, we mean the amount paid plus the amount owed at the end of 30 years. Which strategy results in the smallest total obligation? To pay the interest only each year with the principal unchanged. To pay neither the principal nor the interest so the interest compounds annually. To pay off the principal and interest on a regular basis.

The size of the national debt concerns many people, but it continues to grow. Let's look at three possible ways to respond 1. Pay interest only each year with the principal unchanged. 2. Pay neither principal nor interest so the interest compounds annually. (This is basically the situation in many recent years.) 3. Pay off the principal and interest on a regular basis. Assume a debt of $10 billion, an interest rate of 7%, and a 30-year period. Look at the total obligation resulting from each of these three strategies. By total obligation, we mean the amount paid plus the amount owed at the end of 30 years. Which strategy results in the smallest total obligation? To pay the interest only each year with the principal unchanged. To pay neither the principal nor the interest so the interest compounds annually. To pay off the principal and interest on a regular basis.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 24P

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