Question

Permian Underground Machines & Pipes Co. (PUMP) is in the oil and gas equipment and services industry. It is considering a new oilfield services operation in the Permian Basin. This project would require an outlay of $50 million.

Suppose that PUMP hires Moody’s to assess the company’s credit quality if it were to issue the bonds. Moody’s advises PUMP that it would rate its bonds as Baa.

Managers at PUMP consider issuing a 10-year bond. Currently, the yield on a U.S. Treasury bond with about 10 years to maturity is 1.46%.

Estimate the required rate of return for the bond that PUMP managers are considering.

a. 1.46%
b. 3.86%
c. 5.40%
d. 8.95%
e. 1.93%

Answer 1

Answer:

Option A is correct.

The required rate of return for the bond that PUMP managers are considering is 1.46%

Explanation:

Required rate of return for the bond that PUMP managers are considering is 1.46%.  Because, currently, the yield on a U.S. Treasury bond with about 10 years to maturity is 1.46%. same type of bond yielding is 1.46%.