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