Shefi Nursing College needs GHS2 million to finance the construction of a dormitory. Though the directors have decided to raise the money through a bond offer, they are still considering whether to place the bond in Ghana or outside Ghana. Below are details of the two options available to them:

Option 1: Issue a domestic bond in Ghana

The college would issue a 5-year cedi-denominated bond in Ghana to raise the amount needed to finance the dormitory project. The cedi annual coupon rate would be set at 26%.

Option 2: Issue an international bond

The college would issue a 5-year dollar-denominated bond in Nigeria to raise the dollar equivalent of the amount needed to finance the dormitory project. The dollar annual coupon rate would be set at 10%.

Required:

Compute the effective cost of the dollar loan if annual rate of inflation is expected to be 18% in Ghana and 2% in the United States.

Advise the directors on whether to issue the cedi bond or the dollar bond. Give a reason to support your recommendation.