Problem: 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.