Trooper limited is an American company which needs to raise US$1,000,000 for its expansion inside US....

Trooper limited is an American company which needs to raise US$1,000,000 for its expansion inside US. The options are:

a. A 2-year floating rate note at 1% above the 1-year US Dollar rate. Interest is paid once a year.

b. A 2-year bond sold in the US at a fixed interest rate of 5%.

Currently, the 1-year US dollar LIBOR rate is 3.50% and is expected to rise to 4.5% next year. Which security should the treasurer choose if borrowing costs are same for both securities?

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Expert Solution

Since the borrowing cost of both the options is same in the given case treasure can choose any of the either option.But if the interest rates are falling in the market then it is beneficial to issue floating rate notes because if interest rate falls we will have to pay lesser interest.But if market rates are rising then it is best to go for fixed rate because if interest rate risies we will have to pay the fix rate decided earlier.Here next year rate is expected to to higher therefore it is beneficial to go for option (b) that is 2 year bond fixed rate of interest is 5%.

jeff jeffy answered 1 year ago

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