Stanovich Enterprises has 10-year, 12.0% semiannual coupon bonds outstanding. Ea

Question

Stanovich Enterprises has 10-year, 12.0% semiannual coupon bonds outstanding. Each bond is now eligible to be called at a call price of $1,060. If the bonds are called, the company must replace them with new 10-year bonds. The flotation cost of issuing new bonds is estimated to be $45 per bond. How low would the yield to maturity on the new bonds have to be in order for it to be profitable to call the bonds today, i.e., what is the nominal annual "breakeven rate"?

9.29%

9.78%

10.29%

10.81%

11.35%

Explanation / Answer

Yield of new bond can be calculated using the followig data

Coupon = 12% Semi annual

Maturity is 10 years from now

Face value is $1,000

and Price = 1060 + 45 = 1105

Yield can be calculated as follows

=YIELD(A1,A2,12%,110.5,100,2) = 10.29%

Here A1 and A2 contains today's date and maturity date which is 10 years from now respectively.

In this formula, redemption value has to be entered as 100, and price has entered accordingly as 110.5 which is 1105/10

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.