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Homework answers / question archive / IBM wishes to raise $1 billion and is trying to decide between a domestic dollar bond issue and a Eurobond issue
IBM wishes to raise $1 billion and is trying to decide between a domestic dollar bond issue and a Eurobond issue. The U.S. bond can be issued at a coupon of 6.75 percent, paid quarterly, with underwriting and other expenses totaling 0.95 percent of the issue size. The Eurobond would cost only 0.55 percent to issue but would bear a semi-annual coupon of 6.88 percent. Both issues would mature in ten years.
Assuming all else is equal, which is the least expensive issue for IBM?
And what other factors might IBM want to consider before deciding which bond to issue?
please see the attached file.
a. Assuming all else is equal, which is the least expensive issue for IBM?
The least expensive issue is the one with lower yield to maturity (YTM). I have used Excel to calculate the YTM. The YTM on dollar bond is 7.062% (see excel) and on Eurobond is 7.078%. Hence dollar bond is less expensive.
b. What other factors might IBM want to consider before deciding which bond to issue?
Eurobonds are issued in a new capital market with a different class of investors. So that class of investors will expect IBM should be considered.
The foreign exchange risk is another issue. The issues are that the terms of the bonds in different markets may be different such as call provisions etc.
