Effective Financing Cost
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1.MLC Audio has decided to issue 3-year bonds denominated in 10 million Singapore dollars. The bonds have a coupon rate of 10%. The Singapore dollar is expected to appreciate from its current level of $.82 to $.80, $.79, and $.78 in years 1, 2, and 3, respectively. Calculate the financing cost (in percent) of these bonds. Show how you derive the answer.
2. Marcus, Inc., a U.S. company takes out a 1-year loan in Germany. The U.S. 1-year interest rate is 5%, and the German 1-year interest rate is 6%. The spot rate of the euro is $1.33 and the 1-year forward rate is $1.29. Calculate the effective financing rate for Marcus. Show how you derive the answer.
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This in-depth solution calculates effective financing cost of borrowing in foreign currency with step-by-step calculations and all formulas shown in excel file.
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1.MLC Audio has decided to issue 3-year bonds denominated in 10 million Singapore dollars. The bonds have a coupon rate of 10%. The Singapore dollar is expected to appreciate from its current level of $.82 to $.80, $.79, and $.78 in years 1, 2, and 3, respectively. Calculate the financing cost (in percent) of these bonds. Show how you derive the answer.
Note: The data in the question shows that Singapore dollar is actually depreciationg
Current spot rate is $0.82/SGD which means that it requires $0.82 to purchase one SGD
Spot rate 1,2,3 years from now are $0.80,$0.79 and $0.78 which means that that it would require $0.80,$0.79 and $0.78 to purchase one SGD 1,2 and 3 years from now
USD= US dollars, SGD= Singapore dollars
Face value= 10,000,000 SGD
Coupon rate = 10%
Therefore, annual interest payment= 1,000,000 =10,000,000. x 10.%
Current Spot rate= $0.82
Therefore, amount raised now= $8,200,000 =10,000,000. x 0.82
(Assuming bonds are issued at par ...
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