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Answer: 6.86%
## Calculation Explanation **Step 1: Calculate Debt-to-Equity Ratio** - Total Debt = $34.5 million - Total Equity = $150.0 million - Debt-to-Equity Ratio = $34.5 / $150.0 = 0.23 **Step 2: Determine Credit Rating and Spread** - Debt-to-Equity Ratio = 0.23 falls in the range of 0.20 to 0.25 - According to the matrix, this corresponds to **A** credit rating - Credit Spread for A rating = 1.45% **Step 3: Calculate Implied YTM** - Risk-free rate (US Treasury 10-year YTM) = 5.41% - Credit Spread = 1.45% - Implied YTM = Risk-free rate + Credit Spread = 5.41% + 1.45% = 6.86% Therefore, the implied YTM of the company's 10-year bond is **6.86%**, which corresponds to option C.
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An analyst is estimating the cost of debt for a company's 10-year non-traded bonds. She relies on an internally developed matrix of synthetic credit ratings, a portion of which is presented in the following table:
| Credit Rating | Debt-to-Equity Ratio | Credit Spread (%) |
|---|---|---|
| AAA | Less than 0.15 | 0.80 |
| AA | 0.15 to 0.20 | 1.10 |
| A | 0.20 to 0.25 | 1.45 |
| BBB | 0.25 to 0.30 | 2.10 |
| BB | 0.30 to 0.40 | 2.50 |
The yield to maturity (YTM) on the US Treasury 10-year benchmark government bond is 5.41%. In its most recent financial statements, the company reported equity of $150.0 million and total debt of $34.5 million. The implied YTM of the company's 10-year bond is closest to:
A
1.45%
B
6.51%
C
6.86%