Rainier Bros. has 12.0% semiannual coupon bonds outstanding that mature in 10 years. Each

Question

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"?

Answer 1

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