Proctor and Gamble\'s total amount of debt increased from 31.9% in March 2011 to

Question

Proctor and Gamble's total amount of debt increased from 31.9% in March 2011 to 34.2% in December 2011, mainly due to its net debt issuances to fund general corporate purposes. What was the annual cost of the funds to P&G; raised from the $1.0 billion bonds that mature in 2014? basis points. If the bond sold at 100.10 at the time of issue, investors observed that required annual yield would be Looking at the comparable U.S. Treasury yield, these bonds were issued at a spread of basis points. Because the coupon rate is the yield required by the market, the bond sold at at the time of issue.

Explanation / Answer

A) The annual cost of funds raised would be 70.1 Basis points as follows

Semi Annual Coupn Rate = 0.35%

Annualized rate = ((1.0035)^2)-1

= .701% or 70.1 Basis points

B) If the bond sold at 100.10 at the time of issue then the required annual yeild would be equal to the IRR of the project that is rate at which the PV of cash inflow from coupons and principal repayment would be equal to cash outflow

100.10= PV of (.035+.035+.035+.035+100.35) paid in semi annual intervals

IRR would be = 0.3298% per 6 months or 0.661% p.a.

C) The comparable US treasury rate would be the two year nominal rate i.e. 0.19% thus the bond were issued at a spread of (0.70-0.19)= 51 basis points or .51%.

D) Because the coupon rate is higher than the yeild required by Market the bond sold at a premium at the time of issue.

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