Final answer:
The present value of the interest tax shield for a firm with 5,000 bonds outstanding, each with a face value of $1,000 and a 9 percent coupon, at a tax rate of 34 percent, requires additional information about the bond's yield and duration to calculate accurately.
Step-by-step explanation:
The question asks about calculating the present value of the interest tax shield for a firm's bonds. The firm has 5,000 bonds outstanding, with each bond having a face value of $1,000 and a 9 percent coupon rate, paid annually. Currently, these bonds are selling for 99 percent of par value. The applicable tax rate is given as 34 percent.
To compute the present value of the interest tax shield, one must first ascertain the annual interest payment per bond, which is the coupon rate multiplied by the face value, yielding $90 per bond. Since there are 5,000 bonds, the total annual interest payment is $90 * 5,000 = $450,000. The tax shield is the tax rate multiplied by the total interest payment, so for one year, the tax shield is $450,000 * 0.34 = $153,000. The present value of this annual savings depends on the duration and the bonds' yield, but with the information given, we can only calculate the annual interest tax shield.