answering to this kind of question: The CEO of an European MNC wishes to raise 2m EURO with debt financing. She or he is considering two different instruments: 1) a 5-year floating rate at 1% above the 1-year EURIBOR rate on which interest is paid once a year; 2) a 5-year bond with a fixed interest rate. Which fixed interest rate equalize the cost of the two instruments? Find the data on EURIBOR the World Wide Web. For sake of simplicity consider that the company is willing to repay the debt at the maturity date. Consider also that the CEO may also want to exploit the arbitrage opportunity on the forex market. Would be there such opportunity if the CEO has the availability of 14mEURO? For sake of simplicity consider only the current exchange and interest rates of the UK.
The structure should be:
1) What is Debt financing: consider the bond. what would be the sequence?
2) Clarify the problem, describe the difference between 2 options.
3) 1. Technical: why choosing fixed interest rate is better or floating interest rate is better? 2. Use Formulas to explain, calculations should be included.
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