14. Dual-currency bonds (advanced). R.J. Reynolds is considering a 25-billion-yen debenture to be issued at 101.50 percent of par. The 5-year, annual coupon bond would pay an interest rate of 73∕4 percent denominated in yen, but the principal would be repaid in dollars, rather than yen, in the amount of

$111.956 million.

a. What are the yields to maturity from the perspectives of the issuer, a U.S.-

based pension fund, and a Japanese insurance company that is considering the dual-currency bond as a possible investment? At the time of issue, the spot exchange rate stood at 136.90 yen = $1. Five-year forward contracts were also available at 97.60 yen (bid)–102.70 yen (offer) per dollar.

b. Should R.J. Reynolds prefer a straight $100 million Eurobond issued at 100.125 percent of par that pays an annual coupon of 10.125 percent and is redeemable at par?

c. Alternatively, R.J. Reynolds could issue 25-billion-yen worth of Eurobonds at 100.25 percent of par with a 6.375 percent coupon. This bond is also redeemable at par. Under what exchange rate scenario would you recommend this last option to R.J. Reynolds?

Note: All three debentures carry up-front fees of 1.875 percent of par.