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ITT is considering a new 10-year $1 billion bond offering

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ITT is considering a new 10-year $1 billion bond offering. ITT is rated Baa by Moody’s and its investment bankers advise that such a debt offering would require a 230 bond equivalent basis point spread over the benchmark Treasury note. The benchmark 10-year Treasury note has a bond equivalent yield to maturity of 2.1%.

(a) What is ITT’s pre-tax cost of debt on this issue?

(b) ITT and its investment bankers will set the coupon on this bond so that it sells as close as possible to 99 (% of par) from below using a coupon rate rounded to an even multiple of ten basis points. What will the bond’s coupon rate be under these conditions?

(c) What is the market’s assessment of the probabilities that ITT will make each of the 20 promised cash flows on this bond?