Yankee, a US firm, needs to raise USD1 billion or equivalent to acquire Broncon,
ID: 2620282 • Letter: Y
Question
Yankee, a US firm, needs to raise USD1 billion or equivalent to acquire Broncon, an Australian firm. Therefore, Yankee firm is trying to decide between the following three types of bond issues.
Types of Bonds
Coupon Rate (p.a.)
No of Coupon Payments in a Year
Initial Fees (at t=0) One-off
Debt Maturity
Exchange Rate (per USD)
[Hint] Possible Internal Rate of Return (IRR)
U.S. bond
6%
2
0.85%
3
3.1577%
4.158%
Euro-Eurobond
6.5%
1
0.65%
3
Euro 0.9
6.7465%
7.2216%
Dim-Sum Bond
5.5%
1
0.80%
2
Rmb 6.00
5.9360%
6.9360%
Assuming all else is equal, which is the least expensive bond issue solely based on All-in cost for Yankee firm? Please show your full workings. [Hint: Compare the annualized yield to maturity (YTM) for each bond issue. Use the possible internal rate of return given above to speed up your calculation.] (15 marks)
Types of Bonds
Coupon Rate (p.a.)
No of Coupon Payments in a Year
Initial Fees (at t=0) One-off
Debt Maturity
Exchange Rate (per USD)
[Hint] Possible Internal Rate of Return (IRR)
U.S. bond
6%
2
0.85%
3
3.1577%
4.158%
Euro-Eurobond
6.5%
1
0.65%
3
Euro 0.9
6.7465%
7.2216%
Dim-Sum Bond
5.5%
1
0.80%
2
Rmb 6.00
5.9360%
6.9360%
Explanation / Answer
Bond 1. IRR 4.158%, YTM 3.16%
Bond 2. IRR 7.22%, YTM 6.75%
Bond 3. IRR 6.94%, YTM 5.94%
Would go for Euro Bond because of lowest difference between IRR and YTM.
Coupon #Payments in a year Initial fees Debt maturity Exchange rate YTM IRR US 6% 2 0.85% 3 3.16% 4.16% Euro 6.50% 1 0.65% 3 EURO 0.9 6.75% 7.22% Dim-Sim 5.50% 1 0.80% 2 RMB 6.00 5.94% 6.94%Related Questions
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