AA Airlines has a $1,000 face value bond outstanding. The bond has 25 years left
ID: 2712357 • Letter: A
Question
AA Airlines has a $1,000 face value bond outstanding. The bond has 25 years left until maturity. The bond carries an annual interest payment of $78, and is currently selling for $875 in the marketplace. AA Airlines is in a 30% tax bracket The company wishes to make a new issue of bonds. Assuming the yield to maturity on the new issue will be the same as the yield to maturity on the currently outstanding issue...what will be the required yield to matuirity for the new bond issue? What is AA Airlines' "Cost of Debt"?
Explanation / Answer
Face value (FV) $ 1,000.00 Coupon rate 7.80% Number of compounding periods per year 1 Interest per period (PMT) 78.00 Bond price (PV) $ (875.00) Number of years to maturity 25 Number of compounding periods till maturity (NPER) 25 Bond Yield to maturity RATE(NPER,PMT,PV,FV) Bond Yield to maturity 9.08% Cost of debt 6.36% 9.08%*(1-30%)