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    Borrowing costs for two options

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    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)?

    Please assist with step by step instructions to see how problem is solved.

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    Solution Preview

    See attached file.

    Alternative 1
    The cost is the YTM on the bonds. The amount received is $49 million. The semi annual interest is 50,000,000 X 9%/2 = 2,250,000 and the semi annual periods are 40. Interest is an annuity and so we use the ...

    Solution Summary

    The solution explains how to calculate the borrowing costs for two options

    $2.19

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