Which security has the lowest expected all in cost

Reference no: EM133290862

Case: "CAFÉ COSTA RICA" Company wishes to raise $15,000,000 with debt financing. The Treasurer of the company considers two possible instruments:

i. 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.
ii. A 4-year bond with an annual coupon rate of 2% paid quarterly and an issuance cost of 0.5% of the issuance proceeds.

Currently, the dollar LIBOR is 1.0%.

a. Which security should the Treasurer 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.

b. 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 years 3 and 4, respectively. Which security has the lowest expected "All in Cost" (AIC)?

Reference no: EM133290862

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