Hoopoe Corporation wants to borrow 100 million Canadian dollars at a fixed rate with a maturity of five years. It calculates that it can make an international bond issue with the following terms:

• Interest: 10 5/8 percent payable annually.

• Maturity: 5 years.

• Issue expenses: .2 percent.

A bank has presented Hoopoe with a proposal for a Swiss franc issue combined with a currency swap into Canadian dollars. The proposed terms for the Swiss franc issue are

• Amount: 200 million Swiss francs.

• Interest: 5 3/8 percent annually.

• Maturity: 5 years.

• Issue expenses: .2 percent.

The counterparty of the swap would raise fixed dollars on the following terms:

• Amount: 100 million Canadian dollars (equivalent to 200 million Swiss francs).

• Interest: 10 5/8 percent annually.

• Maturity: 5 years.

• Issue expenses: .15 percent.

The counterparty would be happy with an all-in cost in Swiss francs of 6.45 percent.

a. Which alternative should Hoopoe take? (Ignore credit risk in your analysis.)

b. Suppose that you are the corporate treasurer of Hoopoe. Discuss the credit risk issues involved in the alternatives.