Sambuka, Inc. can issue bonds in either U.S. dollars or in Swiss francs. Dollar-
ID: 2697260 • Letter: S
Question
Sambuka, Inc. can issue bonds in either U.S. dollars or in Swiss francs. Dollar-denominated bonds would have a coupon rate of 12 percent; Swiss franc-denominated bonds would have a coupon rate of 10 percent. Assuming that Sambuka can issue bonds worth $10,000,000 in either currency, that the current exchange rate of the Swiss franc is $.70, and that the forecasted exchange rate of the franc in each of the next three years is $.75, what is the annual cost of financing for the franc-denominated bonds? Which type of bond should Sambuka issue?
Explanation / Answer
Current Worth of bonds in Swiss franc is: 10000000/0.7=14285714 ( calculated Based on current exchange rate of $0.7)
Annual Cost of Swiss franc-denominated bond is (i.e coupon payment ):
14285714 *10%=1428571
Which is equals to USD 1071429 ( converted coupon paymet into USD i.e 1428571/0.75(exchange rate in the next year)
Sambuka has to issue its bonds in Swiss franc's only beacuase of the lower coupon payment and increase in exchange rate.