Question

A $1,000 par bond is currently selling for $1,100. It has a 9% coupon rate, fifteen years remaining to maturity, and pays interest semi-annually. If the firm's tax rate is 35%, what is the after-tax cost of debt

Answer 1

The after-tax cost of debt for the bond is approximately 10.636%

Step-by-step explanation:

To calculate the after-tax cost of debt, we need to consider the coupon payment, tax rate, and the bond price.

First, we calculate the annual coupon payment: $1,000 x 9% = $90

Then, we calculate the after-tax coupon payment: $90 x (1 - 0.35) = $58.50

Next, we calculate the annual yield to maturity (YTM) by dividing the coupon payment by the bond price: $58.50 / $1,100 = 0.05318

Finally, we multiply the annual YTM by 2 (since the bond pays semi-annual interest) to get the semi-annual after-tax cost of debt: 0.05318 x 2 = 0.10636, or 10.636%.