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Is it obvious which security the treasurer should pick

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Reference no: EM132433818

Problem: FE Company wishes to raise $1,000,000 with debt financing. The treasurer of FE Company considers two possible instruments:

i. A 2-year floating-rate note at 1% above 1-year dollar LIBOR on which interest is paid once a year

ii. A 2-year bond with an interest rate of 5%

Currently, the dollar LIBOR is 1.50%.

  1. Is it obvious which security the Treasurer should pick?
  2. Suppose the Treasurer believes that 1-year LIBOR, 1 year from now, will rise to 4.50%. Which security has the lowest expected AIC if borrowing fees are similar for the two instruments?

Reference no: EM132433818

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