Question

Charter Corp. has issued 1588 debentures with a total principal value of ​$1588000. The bonds have a coupon interest rate of 6​%. a.  What dollar amount of interest per bond can an investor expect to receive each year from​ Charter? b.  What is​ Charter's total interest expense per year associated with this bond​ issue?   c.  Assuming that Charter is in a 35​% corporate tax​ bracket, what is the​ company's net​ after-tax interest cost associated with this bond​ issue?   

Answer 1

Part (a)
Total value of bond's principal					$	1588000
No. of bonds						1588
Par value per bond		(total principal/no. of bonds)				1000
Coupon interest rate						6%	p.a.
So, Interest received each per per bond is 1000*6% =					$	60
Part (b)
Interest cost per bond					$	60
Multiplied with no. of shares						1588
Interest cost each year					$	95280
So, Charter's total interest expense per year associated with bond issue is $95,280.
Part ©
After tax interest cost = Interest * (1 - tax rate)
tax rate = 35%
So, After tax interest cost = 95280 * (1 - 0.35)
		61932
So, After tax interest cost associated with bond issue is $61,932.