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Suppose AstraZeneca (the U.K. firm) decides it needs to borrow GBP 10 million over 4...

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Finance

Suppose AstraZeneca (the U.K. firm) decides it needs to borrow GBP 10 million over 4 years. It can either issue a GBP denominated bond in the U.K., or it could issue a Eurodollar bond in Europe. The terms of each issue are as follows:

  • AstraZeneca could issue a 4-year GBP10,000,000 bond at par value with a coupon rate of 5.2% (GBP terms) in the U.K.
  • Alternatively, it could issue a 4-year US dollar-denominated bond and convert the dollars received from the bond issue in year 0 into British pounds at today's Spot exchange rate. The 4-year U.S. dollar-denominated bond would be issued at par value with a coupon of 6% (in US $ terms). Suppose for this problem today's (i.e. in Year 0) Spot (#$/1GBP) rate is $1.40/GBP. Expectations for the future values of the #$/GBP rate over the 4-year period are:
    • Year 1 = $1.404/GBP
    • Year 2= $1.4100/GBP
    • Year 3 = $1.4160/GBP
    • Year 4 = $1.4210/GBP

What is the yield to maturity on the GBP-denominated bond in GBP terms? What is the expected yield to maturity on the $-denominated bond in British pound (GBP)? (Be sure to show your work!). Which bond will AstraZeneca choose?

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