Question

A bond has 6 years until maturity. It pays a coupon of 7% and is currently selling for $960. If the tax rate is 40%, the after-tax cost of debt is:

Group of answer choices

4.86%

4.80%

4.93%

4.72%

Answer 1

The Approximate Yield to Maturity Formula =[Coupon + ( Face Value - Market Price) / Number of years to maturity] / [( Face Value + Market Price)/2 ] *100

Since this formula gives an approximate value, the financial calculators can be used alternatively.

where,

Par Value = $ 1,000

Market Price = $  960

Annual rate = 7% and

Maturity in Years = 6 Years

Hence the yield to maturity = 7.86%

Now, the after tax cost of debt = Yield to Maturity * (1- tax Rate)

= 7.86% * ( 1-40%)

= 4.716%

= 4.72%

Answer = 4.72%