Question

Assume that Seminole, Inc., considers issuing a Singapore dollar‑denominated bond at its present coupon rate of 7 percent, even though it has no incoming cash flows to cover the bond payments. It is attracted to the low financing rate, since U. S. dollar-denominated bonds issued in the United States would have a coupon rate of 12 percent. Assume that either type of bond would have a four­‑year maturity and could be issued at par value. Seminole needs to borrow $10 million. Therefore, it will either issue U. S. dollar denominated bonds with a par value of $10 million or bonds denominated in Singapore dollars with a par value of S$20 million. The spot rate of the Singapore dollar is $.50. Seminole has forecasted the Singapore dollar’s value at the end of each of the next four years, when coupon payments are to be paid:

                        End of Year                 Exchange Rate of Singapore Dollar

                                 1                                       $.52

                                 2                                        .56

                                 3                                        .58

                                 4                                        .53

Determine the expected annual cost of financing with Singapore dollars. Should Seminole, Inc., issue bonds denominated in U.S. dollars or Singapore dollars? Explain (Using IRR to find the %).

Answer 1

Expected annual cost of financing in Singapore Dollar = 8.96896%

Seminole shall issue bonds denominated in Singapore Dollar since the annual cost is lower at 8.97% compared to the 12% interest in US Dollar.

Details of calculation as below: