To help ease a continuing need for financing, Continental Trade Corp. is considering borrowing by issuing bonds. The companys investment bank proposes two options.

Option A: semi-annual coupon bond with a maturity of 5 years, 5% coupon rate. It is expected to be issued at par.

Option B: quarterly coupon bond with a maturity of 5 years, 6% coupon rate. It is expected to be issued at a price of 101 per 100 of par value.

Answer the following questions:

1) Compute the bond equivalent yield (BEY) of option A. (Write in percentage terms keeping two digits after the decimal point without the % sign.)

Answer: Answer

2) Compute the bond equivalent yield (BEY) of option B. (Write in percentage terms keeping two digits after the decimal point without the % sign.)

Answer: Answer

3) Which bond should the company choose from the point of view of borrowing cost?

Answer:

Option A

Option B