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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.

#### 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