Virginia Tech FIN FIN MISC A company wishes to raise $15,000,000 with debt financing. The treasurer of Company considers two possible instruments : i. A 4-year floating-rate
treasurer of Company considers two possible instruments:
A 4-year floating-rate note at 1.5% above the one-year dollar LIBOR rate on which interest is paid semiannually. No issuance costs.
A 4-year bond with an annual coupon rate of 2% paid quarterly and with an issuance cost of 0.5% of the issuance proceeds.
a. Which security the Treasurer should pick? Open ended question. I expect you to give some economic arguments to support your claim. There is no right or wrong answer. It depends on
your assumptions of the future LIBOR rates.
Suppose the Treasurer believes that the one-year LIBOR rate one year from now will rise to 3.50%. After that the LIBOR rate is forecast to be 2.00% and 1.50% for year 3 and 4,
respectively. Which security has the lowest expected “All in Cost” (AIC)?
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