Bond Financing Analysis
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Sambuka, Inc., can issue bonds in either U. S. dollars or in Swiss francs. Dollar- denominated bonds would have a coupon rate of 15 percent; Swiss francâ?" denominated bonds would have a coupon rate of 12 percent. Assuming that Sambuka can issue bonds worth $ 10 million 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 3 years is $. 75, what is the annual cost of financing for the franc- denominated bonds? Which type of bond should Sambuka issue?
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If Sambuka issues Swiss franc-denominated bonds, the bonds would have a face value of
$10,000,000/$.70 = Sf14,285,714.
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