The Implicit Interest Cost (IIC) of Bonds

Abstract

Issuing various types of bonds is a very profitable way to borrow funds from organizations, particularly when the corporate profit tax is high. Sometimes, borrowing funds by issuing bonds may become costly. In some other cases, the cost of borrowing may become negative. The present paper shows how to calculate the Implicit Interest Cost of different types of bonds as well as other fixed-income securities. In the case of Mixed Bonds, a new formula (Amortization Method) has been included. The study, using hypothetical data, proves that when corporate profit tax is high, issuing bonds to borrow funds by the corporate organizations is very cost-effective. The study concludes that effective interest cost, also known as the Implicit Interest Cost (IIC), in many cases may become near to zero or even negative. Therefore, corporate organizations should raise funds by issuing bonds rather than issuing new shares or borrowing from the banking sector.