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# annual cost of financing

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Assume that Seminole Inc. considers issuing a Singapore dollar-denominated bond at its present coupon rate of 7 percent, even though it has no incoming Singapore dollar cash flows to cover the bond payments. It is attracted to the low financing rate, since U.S.-dollar bonds issued in the United States would have a coupon rate of 12 percent. Assume that either type of bond would have a four-year maturity and could be issued at par value. Seminole needs to borrow \$10 million. Therefore, it will issue either U.S.-dollar bonds with a par value of \$10 million or bonds denominated in Singapore-dollar with a par value of S\$20 million. The spot rate of the Singapore dollar is \$.50. Seminole has forecasted the Singapore dollarâ??s value at the end of each of the next four years, when coupon payments are to be paid.

End of Year Exchange Rate of S\$

1 \$0.52
2 \$0.55
3 \$0.58
4 \$0.60

Determine the expected annual cost of financing with Singapore dollars. Should Seminole Inc. issue bonds denominated in U.S. dollars or in Singapore dollars? Explain.

#### Solution Preview

Hi,

Coupon rate on bond 7%
YTM in US 12%
Time to maturity 4 years
Par value of the bond, (In Singapore, \$) \$20,000,000
Par value of the bond, (In US, \$) \$10,000,000
Spot rate of Singapore dollar \$0.50 (In ...

#### Solution Summary

The annual cost of financing is examined.

\$2.19