For each of the following $1,000 par value bonds, assuming annual interest payment and a 21% tax rate

USING EXCEL FORMULAS ONLY AND SHOWING ALL WORK:

COST OF DEBT USING THE APPROXIMATION FORMULA: For each of the following $1,000 par value bonds, assuming annual interest payment and a 21% tax rate, please calculate the after-tax cost to maturity using the approximation formula B

Bond	Life (yrs)	Underwriting Fee	Discount(-) or Premium(+)	Coupon Interest Rate
A	20	$25	-$20	9%
B	16	40	+10	10
C	15	30	-15	12
D	25	15	par	9
E	22	20	-60	11

Expert Solution

Bond a	Par Value b	Life (years) c	Underwriting fee d	Discount(-) or Premium(+) e	Coupon Interest Rate f	Bond Price g = (b-d+e)	Coupon Payment h = f*b	Bond Price - Par value i = b - g	j = i/c	k = h+j	(Bond Price + Par value) / 2 l = (b + g)/2	Cost to maturity m = k/l	Tax rate n	After tax cost to maturity o = m*(1-n)
A	1,000	20	25.00	-20	9%	955.00	90	45.00	2.2500	92.2500	977.50	9.437%	21%	7.455%
B	1,000	16	40.00	10	10%	970.00	100	30.00	1.8750	101.8750	985.00	10.343%	21%	8.171%
C	1,000	15	30.00	-15	12%	955.00	120	45.00	3.0000	123.0000	977.50	12.583%	21%	9.941%
D	1,000	25	15.00	0	9%	985.00	90	15.00	0.6000	90.6000	992.50	9.128%	21%	7.211%
E	1,000	22	20.00	-60	11%	920.00	110	80.00	3.6364	113.6364	960.00	11.837%	21%	9.351%

Notes:

after-tax cost to maturity formulae is given below

Assumed annual interest payment

coupon payment is calculated by calculating interest on bonds par value.

jeff jeffy answered 2 years ago

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