A previously issued A2, 15-year industrial bond provides a return one-fourth hig

Question

A previously issued A2, 15-year industrial bond provides a return one-fourth higher than the prime interest rate of 11 percent. Previously issued A2 public utility bonds provide a yield of three-fourths of a percentage point higher than previously issued A2 industrial bonds of equal quality. Finally, new issues of A2 public utility bonds pay three-fourths of a percentage point more than previously issued A2 public utility bonds. What should be the interest rate on a newly issued A2 public utility bond?

Explanation / Answer

Prime Interest rate = 11%

A2 Industrial bond return is 25% more =11*1.25=13.75%

Previous A2 Utlity bond return is 3/4% =0.75% mre than A2 industrial bond return =13.75%+0.75% =14.5%

Newly issued A2 utility bonds pay 3/4% =0.75% more than previous A2 utility bond =14.5+0.75 =15.25%

So the return on newly issued A2 utlity bond is 15.25%

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