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P&G decides to raise debt totaling $10,000,000 and has the options described below: i) A 2-year bond with a fixed interest rate of 4% ii)

P&G decides to raise debt totaling $10,000,000 and has the options described below: i) A 2-year bond with a fixed interest rate of 4% ii) A 2-year note with a floating-rate with interest payable annually. Given P&Gs credit rating, its spread over LIBOR is 1.2%. Currently, the dollar LIBOR is 1.50%.

Suppose that P&G expects that in one year the 1-year LIBOR will rise to 5.50%. Assume that there are no transaction costs or other fees associated with either of the two issues. Which option should P&G pick? (Hint: You can use the quadratic equation to answer this question.)

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