Question

Sony Bond
Par value ​ $1000	Coupon interest rate 7.0%	Corporate tax rate 35%
Cost          ​$890	Years to maturity 10

Answer the following​ questions:

a.  Calculate the ​before-tax cost of the Sony bond using the​ bond's yield to maturity​ (YTM).

b.  Calculate the ​after-tax cost of the Sony bond given the corporate tax rate.

a.  The before-tax cost of the Sony bond using the​ bond's yield to maturity​ (YTM) is ???%.

​(Round to two decimal​ places.)

b.  The after-tax cost of the Sony bond given the corporate tax rate is ???%

​(Round to two decimal​ places.)

Answer 1

YTM is the rate at which PV of Cash inflows are equal to Bond price.

Year	CF	PVF @8%	Disc CF	PVF @9%	Disc CF
0	$ -890.00	1.0000	$ -890.00	1.0000	$ -890.00
1	$      70.00	0.9259	$    64.81	0.9174	$    64.22
2	$      70.00	0.8573	$    60.01	0.8417	$    58.92
3	$      70.00	0.7938	$    55.57	0.7722	$    54.05
4	$      70.00	0.7350	$    51.45	0.7084	$    49.59
5	$      70.00	0.6806	$    47.64	0.6499	$    45.50
6	$      70.00	0.6302	$    44.11	0.5963	$    41.74
7	$      70.00	0.5835	$    40.84	0.5470	$    38.29
8	$      70.00	0.5403	$    37.82	0.5019	$    35.13
9	$      70.00	0.5002	$    35.02	0.4604	$    32.23
10	$      70.00	0.4632	$    32.42	0.4224	$    29.57
10	$ 1,000.00	0.4632	$ 463.19	0.4224	$ 422.41
NPV	$    42.90		$   -18.35

YTM = Rate at which least +ve NPV + [ NPV at that Rate / Change in NPV due to 1% inc in Rate ] * 1%

= 8% + [ 42.90 / 61.25 ] * 1%

= 8% + 0.70%

= 8.70%

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

= 8.70% * ( 1 - 0.35 )

= 8.7% * 0.65

= 5.66%