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Comparing borrowing costs - A2

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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)?
Why?

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Solution Summary

This solution is comprised of detailed calculation of the two options provided and the one with lower cost is identified.

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