Question: Stephen Security has two financing alternatives: (1) A publicly placed %50 million bond issue. Issuance costs are $1 million, the bond has a 9% coupon

Stephen Security has two financing alternatives:

(1) A publicly placed %50 million bond issue. Issuance costs are $1 million, the bond has a 9% coupon paid semiannually, and the bond has a 20 year life.

(2) A $50 million private placement with a large pension fund. Issuance costs are $500,000, the bond has a 9.25% annual coupon, and the bond has a 20 year life. Which alternative has the lower cost (annual percentage yield)?

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