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?

Question

Quizplus · Accepted Answer

First, we need to determine the yield on the 20-year Treasury bond. 
3-month Treasury bill rate = 2.75%
Yield on 20-year Treasury bond = 2.75% + 1.80% = 4.55%
Next, we need to determine the bond rate for a firm with an A rating. 
Bond rate for A-rated firm = 4.55% + 0.50% = 5.05%
Therefore, the loan rate for Castle Co. would be 5.05%.

Castle Co Needs to Borrow $10 Million for Process Improvement Upgrades