Question

Russel Container Corporation has a $1.000 par value bond outstanding with 20 years to maturity. The bond carries an annual interest payment of $99 and is currently selling for $920 per bond Russell Corp. isina 25 percent wacket. The firm wishes to know what the aftertax cost of a new bond issue isely to be. The yeld to maturity on the new issue will be the same as the yield o mahnity on the old issue because there and many date will be Compute the yeld to maturity on the old issue and use this as the yield for the new issue (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places) the t w o of not round intermediate calculations input your answer as a percent rounded to 2 decimal places)

Answer 1

a

K = N

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

k=1

K =20

920 =∑ [(9.9*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^20

k=1

YTM% = 10.9

Using Calculator: press buttons "2ND"+"FV" then assign

PV =-920

PMT = Par value * coupon %=1000*9.9/(100)

N =20

FV =1000

CPT I/Y

Using Excel

=RATE(nper,pmt,pv,fv,type,guess)

=RATE(20,-9.9*1000/(100),920,-1000,,)

b

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

After tax rate = 10.9 * (1-0.25)

After tax rate = 8.18