Question

a company has a bond outstanding that sells for 1049 and matures in 21 years. The bond pays semiannual coupons and has a coupon rate of 5.78 percent. The par value is 1000. If the companys tax rate is 35 percent, what is the aftertax cost of debt?

Answer 1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =21x2

1049 =∑ [(5.78*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^21x2

k=1

YTM% = 5.39

After tax rate = YTM * (1-Tax rate)

After tax rate = 5.3875 * (1-0.35)

After tax rate = 3.5