stephens security has two fianacing alternatives... 1-A2. (Comparing borrowing c
ID: 2666530 • Letter: S
Question
stephens security has two fianacing alternatives...1-A2. (Comparing borrowing costs) Stephens Security has two financing alternatives: (1) A publicly
placed $50 million bond issue. Issuance costs are $1 million, the bond has a 9%
coupon paid semiannually, and the bond has a 20-year life. (2) A $50 million private placement
with a large pension fund. Issuance costs are $500,000, the bond has a 9.25% annual
coupon, and the bond has a 20-year life. Which alternative has the lower cost (annual percentage
yield)?
Explanation / Answer
1. n = 40 r = ? PV = -($50 - $1) = -$49 PMT = 9% / 2 x $50 = $2.25 FV = $50 r = 4.61%
APY = (1 + 0.0461)2 -1 = 9.4334%
==================
2. n = 20 r = ? PV = -($50 - $0.5) = -$49.5 PMT = 9.25% x $50 = $4.625 FV = $50 r = 9.36%
APY = 9.36%
Choice 2 has the lower APY.
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