4. (5 pts) XYZ can issue 4-year bonds in either US dollars or Euros. US dollar denominate bonds would have a coupon rate of 6% if issued at par value. Euro denominated bonds would have a coupon rate of 4% if issued at par value. Assume that XYZ can issue bonds worth $20 million in either currency. Also assume the current exchange rate is $1.25/1EUR and that the forecasted exchange rate of the Euro in each of the next four years is listed below.

Yr 0 Yr 1 Yr 2 Yr 3 Yr 4

#of US$/ 1 Euro $1.25 $1.23 $1.27 $1.28 $1.33

What is the expected annual cost of issuing the 4 year Euro denominated bonds to the US company according to their 4 year forecast?

Expected Cost (as a % rate) of 4-yr Euro Bonds =_______________%_

What would be the expected return to a European investor who purchased XYZs Eurobonds?

Expected return to a European investor = __________%_

Which type of bonds should XYZ issue if their forecast is correct?

EuroBonds or US Bonds