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Choosing Between Two Financing Options

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(Comparing borrowing costs) 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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This solution provides a complete computation of the given finance problem in Excel.

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Alternative 1

Face value $50 million
Issuance costs $1 million
Coupon 9%
Interest payments Semi-annual
Life of bond 20 years

Period Decsription Amount
0 Receipts from bond issuance, net $(49.00)
1 Coupon interest payment $2.25
2 Coupon interest payment $2.25
3 Coupon interest payment $2.25
4 Coupon interest payment $2.25
5 Coupon interest payment $2.25
6 Coupon interest payment $2.25
7 Coupon interest payment $2.25
8 Coupon interest payment $2.25
9 Coupon interest payment $2.25
10 Coupon interest payment $2.25
11 Coupon interest payment $2.25
12 Coupon interest payment $2.25 ...

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