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FIN Stephens

# FIN Stephens - (annual percentage yield 1 n = 40 r = PV...

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A2. (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
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Unformatted text preview: (annual percentage yield)? 1. n = 40 r = ? PV = -(\$50 - \$1) = -\$49 PMT = 9% / 2 x \$50 = \$2.25 FV = \$50 r = 4.61% APY = (1 + 0.0461) 2-1 = 9.4334% 2. n = 20 r = ? PV = -(\$50 - \$0.5) = -\$49.5 PMT = 9.25% x \$50 = \$4.625 FV = \$50 r = 9.36% APY = 9.36% Choice 2 has the lower APY....
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