Question

a company. has a bond outstanding that matures in 25 years and carries a 2.5 percent coupon. Interest is paid semi-annually. The bond is currently priced at 107 percent of its face value. The tax rate is 35 percent. What is the after-tax cost of debt?

Please provide full steps and financial calculator steps

Answer 1

Answer-

Given

Face value = FV = 100
Present value = PV = 107
Coupon payment = 2.5 % paid semiannually = 2.5 % / 2 = 1.25 %
PMT = 1.25 % x $ 100 = $ 1.25 semiannually
Number of periods = N = 25 x 2 = 50
Interest rate = I/Y = ?

YTM = I/Y = 1.06856 %
This is semiannual YTM
Annual YTM = 1.06856 % x 2 = 2.1371 %

After tax cost of debt = 2.1371 % x ( 1 - tax rate )

After tax cost of debt = 2.1371 x ( 1 - 35 % )
After tax cost of debt = 2.1371 x ( 1 - 0.35 )
After tax cost of debt = 2.1371 x 0.65
After tax cost of debt = 1.389 %