What does True Interest Cost (TIC) reflect in bond transactions?

True Interest Cost (TIC) is a critical measure in bond transactions that reflects the effective interest rate of a bond issue, incorporating both the interest payments and the purchase price of the bonds. It provides a comprehensive view of the total cost of borrowing, factoring in how the bonds are priced in the market. By using TIC, an issuer can effectively compare the economic impact of different bond structures or financing options, helping to assess the true cost of the debt over its lifespan.

This measure is particularly beneficial because it captures the relationship between the interest rate and the bond’s price, thereby reflecting how much the issuer will ultimately pay for the funds raised through the bond issuance. When issuers evaluate multiple bids or offers from underwriters, TIC helps determine which offer results in a lower overall cost of borrowing.

The other options focus on different aspects of bonds or financial indicators that are not directly related to the True Interest Cost. Price volatility refers to how much the price of bonds can fluctuate in the market, without directly linking it to the cost of borrowing. Projected interest earnings deal more with income from investments rather than the cost to issue bonds. Default risk addresses the likelihood that an issuer may fail to meet its payment obligations, which is relevant for assessing the overall risk associated