A zero coupon bond has a par value of $10,000 and a current price of $5,000....

A zero coupon bond has a par value of $10,000 and a current price of $5,000. If the bond has 8 years to maturity, what is its after- tax yield to maturity for an investor paying 25% taxes? A. 4.4% B. 4.9%C. 5.2% D. 6.6% E. 6.8%

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Expert Solution

Information provided:

Par value= future value= $10,000

Present value= $5,000

Time= 8 years

Tax rate= 25%

The question is solved by first calculating the before tax cost of debt.

The before tax cost yield to maturity is calculated by computing the yield to maturity.

The below is entered in a financial calculator to compute the yield to maturity:

FV= 10,000

PV= -5,000

N= 8

Press the CPT key and I/Y to calculate the yield to maturity.

The value obtained is 9.05%.

Therefore, the before tax yield to maturity is 9.05%.

After tax yield to maturity= Before tax yield to maturity*(1- tax)

= 9.05%*(1- 0.25)

= 9.05%*0.75

= 6.7875% 6.79%.

Therefore, the answer is option e.

jeff jeffy answered 1 year ago

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