Suppose PepsiCo wishes to raise capital in the international bond market to help finance the acquisition of the South African business unit. Suppose the company could issue a 3-year US dollar bond with a face value of $10 million that would be sold at 99% of par with an annual coupon rate of 3.8%. Expenses associated with the US dollar bond issue are 1.5% of the bonds face value. Suppose also the company can issue a 3-year Euroyen with a yen face value of Yen 1.10 billion. The Euroyen bond would be issued at 101% of par with an annual coupon rate of 5% (i.e. coupons are paid annually). Expenses on the Euroyen bond are 2.2% the yen bonds face value. Assume also if the company issues a Euroyen bond, then it will wish to hedge the risk of this bond in the forward market. The forward rates at which the company can manage its risk are as follows:

Bid Offer

2020 Yen 109.6/$ Yen 110/$ (spot)

2021 Yen 112.5 Yen 112.9/$ (forward)

2022 Yen 113/$ Yen 114/$ (forward)

2023 Yen 115/$ Yen 116/$ (forward)

(i)(9 points) What is the firms all-in dollar cost (=$ yield to maturity) of the US bond? What is the firms all-in dollar cost (=$ yield to maturity) of the Euroyen bond? Which should bond should PepsiCo choose (be sure to show your work to justify)?

(ii)(4 points) If PepsiCo wished to consider a currency swap to hedge its exchange risk, how the would swap be structured (which currency would it pay, which currency would it receive), and why might PepsiCo consider this hedge? [discuss onlyno calculations needed]