XYZ can issue 4-year bonds in either US dollars or Euros.US dollar denominate bonds would have a coupon rate of 6% if issued at par value.Euro denominated bonds would have a coupon rate of 4% if issued at par value.Assume that XYZ can issue bonds worth $10 million in either currency.Also assume the current exchange rate is $1.25/1EUR and that the forecasted exchange rate of the Euro in each of the next four years is listed below.

Yr 0Yr 1Yr 2Yr 3Yr 4

#of US$/ 1 Euro$1.25$1.23 $1.26 $1.28 $1.30

What is the expected annual cost of issuing the 4 year Euro denominated bonds to the US company according to their 4 year forecast?

Expected Cost (as a % rate) of 4-yr Euro Bonds =_____________%_

What would be the expected return to a European investor who purchased XYZ's Eurobonds?

Expected return to a European investor = __________%_

Which type of bonds should XYZ issue if their forecast is correct?

EuroBondsorUS Bonds