Final answer:
An investor can expect to receive $70 per bond per year from Charter, with a total annual interest expense of $199,430. After a 21% tax, the net cost is $157,549.70. Bond prices fall below face value when market rates exceed the coupon rate.
Step-by-step explanation:
To answer the Charter Corp. bond questions: a. The dollar amount of interest per bond that an investor can expect to receive each year is calculated by multiplying the par value ($1,000) by the coupon rate (7%), which equals $70 per bond per year. b. Charter's total interest expense per year for all debentures is found by multiplying the interest per bond by the number of bonds issued (2,849), resulting in a total annual interest expense of $199,430.
c. After applying a 21% corporate tax rate, Charter's net after-tax interest cost can be calculated by taking the total annual interest expense and subtracting the tax savings, which is 21% of the interest expense. The tax savings amount to $41,880.30 ($199,430 * 21%), so the net cost after tax is $157,549.70 ($199,430 - $41,880.30).
Considering the provided bond market information: When the market interest rate rises above the coupon rate, the bond's price will generally decrease. In the example of a local water company's bond with a coupon rate of 6%, if market interest rates rise to 9%, one would expect to pay less than the bond's face value, or less than $10,000, due to the increase in prevailing interest rates. If an investor is seeking a yield of 12%, they might be willing to pay $964 for a bond expected to pay $1,080 in a year, as this investment would provide the desired yield.