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 borrowing cost for this transaction?

Question

Quizplus · Accepted Answer

First, we need to calculate the yield on 20-year Treasury bonds by adding the 1.80 percent premium to the 3-month Treasury bill rate:

2.75% + 1.80% = 4.55%

Next, we need to add 50 basis points (0.50%) to this yield for the firm's A credit rating:

4.55% + 0.50% = 5.05%

Therefore, the borrowing cost for Castle Co. is 5.05%.

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