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Rainier Bros
Rainier Bros. has 12.0% semiannual coupon bonds outstanding that mature in 10 years. 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"?
Please show in excel
Expert Solution
Computation of Nominal Annual Breakeven Rate using Rate Function in Excel:
=rate(nper,pmt,-pv,fv)*2
Here,
Rate = Nominal Annual Breakeven Rate = ?
Nper = 10 years*2 = 20 Periods
PMT = $1,000*12%/2 = $60
PV = $1,060 + $45 = $1,105
FV = $1,000
Substituting the values in formula:
=rate(20,60,-1105,1000)*2
Rate or Nominal Annual Breakeven Rate = 10.29%
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