Question: (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)?
| Bond |
$50,000,000 |
| Coupon |
9.00% |
| Maturity |
20 |
| Iss cost |
-$1,000,000 |
| Year |
|
| 0 |
|
| 1 |
|
| 2 |
|
| 3 |
|
| 4 |
|
| 5 |
|
| 6 |
|
| 7 |
|
| 8 |
|
| 9 |
|
| 10 |
|
| 11 |
|
| 12 |
|
| 13 |
|
| 14 |
|
| 15 |
|
| 16 |
|
| 17 |
|
| 18 |
|
| 19 |
|
| 20 |
|
|
|