A multinational company based in the USA wishes to raise $1 billion and is trying to decide between a domestic dollar bond issue and a Eurobond issue. The U.S. bond can

be issued at a coupon of 6.75%, paid semiannually, with underwriting and other expenses totaling 0.95% of the issue size. The Eurobond would cost only 0.55% to issue but would bear an annual coupon of 6.88%. Both issues would mature in 10 years.

(a) Assuming all else is equal, which is the least expensive issue for the company?

(b) What other factors might the company want to consider before deciding which bond to issue?

(c) In a separate financing, the company needs to borrow $10 million in three months for a six-month period. To lock in the rate on this loan, they buy a ''3 6'' Forward Rate Agreement on LIBOR at 5% from their bank for a notional principal of $10m.

(i) Explain what is meant by a "3 6" Forward Rate Agreement. (ii) Suppose that in three months LIBOR6 turns out to be 5.3%.

Calculate the interest payment that will have to be made in three months and indicate which party will receive the payment.