Explain how low would the yield to maturity on the new bond

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Q. Rainier Bros. has 12.0% semi-annual 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 industry must replace them with new 10-year bonds. The flotation cost of issuing new bonds is estimated to be $45 per bond. Explain 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., illustrate what is the nominal annual "breakeven rate"?

Reference no: EM1398947

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