Question

Suppose Intel wishes to raise $1 billion and is deciding between a domestic dollar bond issue and a Eurobond issue. The US bond can be issued at 1-year maturity with a coupon of 4.5% paid annually. The underwriting, registration and other fees total 1% of the issue size. The Eurobond carries a lower annual coupon of 4.25% but the total costs of issuing the bond runs 1.25% of the issue size. Which loan has the lower AIC?

Answer 1

1 Case that is raising fund using the US Bonds have a lower All-in Cost i.e. $55.45 Million

Step-by-step explanation:

The computation for lower AIC is shown below:-

1 Case :- Through issuing the US Bonds

Annual Coupon Rate = 4.5%

Underwriting, Registration and other fees = 1% of the Issue size = $0.01 Billion

All-in Cost = Underwriting, Registration and other fees + Interest

= ($1 Billion × 1%) + ($ 1.01 Billion × 4.5%)

= $0.01 Billion + $0.04545 Billion

= $0.05545 Billion

= $55.45 Million

2 case Through issuing the Euro Bonds.

Annual Coupon Rate = 4.25%

Underwriting, Registration and other fees = 1.25% of the Issue size = $0.0125 Billion

All-in Cost = Underwriting, Registration and other fees + Interest

= ($1 Billion × 1.25%) + ($1.0125 Billion × 4.25%)

= $0.0125 Billion + $0.04303125 Billion

= $0.05553125 Billion

= $55.53125 Million

Therefore, 1 case that is raising fund using the US Bonds have a lower All-in Cost i.e. $55.45 Million