Help! I need the steps to this question. Ford Motors considers issuing a Singapo

Question

Help! I need the steps to this question. Ford Motors considers issuing a Singapore dollar denominated bond at its present coupon rate of 7.5%. The U. S. dollar­denominated bonds issued in the United States would have a coupon rate of 12%. Ford could either issue U. S. dollar denominated bonds with a par value of $10 million or bonds denominated in Singaporean dollar for equivalent amount at current spot rate of 1 Singaporean dollar=$0.40.The forecasted value of Singapore dollar at the end of each of the next four years are: $0.42, $0.46, $0.48 and $0.43 respectively Should Ford Motors issue bonds denominated in Singapore dollars?

Explanation / Answer

If the bonds are issued in $, the annual interest would be $1,200,000 for the four years and the redemption at the end of the fourth year would be $10,000,000 (assuming that the bond is redeemable at the end of the 4th year)

If the bonds are issued in SD, the total amount would be 10,000,000/0.4 = 25,000,000 SD

The interest payable would be 25,000,000*7.5% = 18,750,000 SD per year.

Converted into $, it would be

1st year 18750000*0.42 = 7,875,000

2nd year 18750000*0.46 = 8,625,000

3rd year 18750000*0.48 = 9,000,000

4th year 18750000*0.43 = 8,062,500

(The payment at maturity would be 25,000,000*0.43 = 10,750,000-maturity date not mentioned)

Ford Motors should issued bonds denominated in SD, as the $ equivalent of interest payable for the four years is much less than the annual interest payable if the loan is in $.

Note: The problem is silent as to the redemption of the bond and does not give discount factors to find PV of all cash flows.

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