Question

4. Cost of bond. XYZ Corporation has an outstanding 10-year bond with a 6% coupon rate which sells for $1,015. The company has a 35% tax rate. How much does the bond cost to the company? 3.77% With detailed calculated steps.

Answer 1

K = N

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

k=1

K =10

1015 =∑ [(6*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^10

k=1

YTM% = 5.8

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

PV =-1015

PMT = Par value * coupon %=1000*6/(100)

N =10

FV =1000

CPT I/Y

Using Excel

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

=RATE(10,-6*1000/(100),1015,-1000,,)

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

After tax rate = 5.8 * (1-0.35)

After tax rate = 3.77