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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.

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Answer: We have,
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.