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    Comparing Borrowing Costs via Annual Percentage Yield

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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)?

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    Solution Summary

    The solution gives a concise explanation of how to compare the alternatives set out to a fictional company by looking at their YTM on bonds issues in an attached spreadsheet.