A previously issued A2, 15-year industrial bond provides a return one-half highe

Question

A previously issued A2, 15-year industrial bond provides a return one-half higher than the prime interest rate of 10 percent. Previously issued A2 public utility bonds provide a yield of five-eighths 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? (Do not round intermediate calculations. Input your answer as a percent rounded to 3 decimal places.)

Interest rate:

Explanation / Answer

return on industrial bonds = 1.5*10 = 15%

return on public utility bonds = 15% + 5/8% = 15.625%

return on new issues of A2 public utility bonds = 15.625% + 0.75% = 16.375%

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