Problem:
(Comparing borrowing costs) Stephen Security has two financing alternative: (1) A publicly placed $50 million bond issues. Issuance costs are $1 million, the bond has a 9% coupon paid semiannually, and the bond has a 20-year life. (2) A $50 million private placement with a large pension fund. Issuance costs are $500,00, the bond has a 9.25% annual coupon, and the bond has a 20 year life. Which alternative has the lower cost (annual percentage yield)?