Question

castle co. needs to borrow $10 million for process improvement upgrades. management decides to sell 20-year bonds. they determine that the 3-month treasury bill rate is 2.75 percent, the firm's credit rating is a, and the yield on 20-year treasury bonds is 1.80 percent higher than that for 3-month treasury bills. bonds with an a rating are selling for 50 basis points above the 20-year treasury bond rate. what is the loan rate for this transaction

Answer 1

The loan rate for Castle Co.'s 20-year bond issuance is 5.05%, which includes the 3-month Treasury bill rate, the yield premium for 20-year Treasury bonds, and the additional premium for an A-rated corporate bond.

Step-by-step explanation:

To calculate the loan rate for Castle Co.'s 20-year bond issuance, we'll use the following information:

• The 3-month Treasury bill rate is 2.75%.
• The yield on 20-year Treasury bonds is 1.80% higher than the 3-month Treasury bill rate.
• Bonds with an A rating, such as Castle Co.'s, are selling for 50 basis points (0.50%) above the 20-year Treasury bond rate.

First, we find the yield on 20-year Treasury bonds by adding 1.80% to the 3-month Treasury bill rate:

2.75% + 1.80% = 4.55%

Next, we add the premium for Castle Co.'s A rating, which is 50 basis points above the 20-year Treasury bond rate:

4.55% + 0.50% = 5.05%

Therefore, the loan rate for Castle Co.'s bond issuance would be 5.05%.