Question

You are assigned to borrow $10,000,000 for eight weeks for your company. You got quotes for New York (international), Great Britain (British) and Switzerland (Swiss-Eurobond) definitions of interest day count conventions. You are given a rate of 5.75% per annum by all potential lenders. From which source should you borrow? Prepare a detailed table on your costs and show which option is the least costly. (Look at the conventions for day counts in your handouts)

Day count conventions for calculating annual rates: International: Financial year=360 days Great Britain: Financial year=365 days Swiss Eurobond: 30/360 (1 month=30 days, 4 weeks= one month), financial year=360 days

Answer 1

Source	Day count	Financial year	No of days borrowed	No of days as per day count convention	No of days in financial year	Days count fraction	Interest paid on borrowing
						=Days/ full year	=10,000,000*5.75%*Days count
International	Actual	360	56	56	360	0.156	$                           89,444.44
British	Actual	365	56	56	365	0.153	$                           88,219.18
Swiss	30	360	56	60	360	0.167	$                           95,833.33

Comments-
Swiss day count is 60 days borrowing since 8 weeks is accounted as 2 months and by 30 days month count, the day count becomes 30*2= 60 days.
We don’t actually need to calculate the interest paid on borrowing during the period. Since the principal and coupon rate are equal, the only differentiator is the day count fraction.
The least costly option is the one with lowest interest payable at the end of the borrowing period or the one with the lowest days count fraction. This is the British borrowing