David Abbot is interested in purchasing a bond issued by Sony. He has obtained t

Question

David Abbot is interested in purchasing a bond issued by Sony. He has obtained the following information on the security:

                                        SONY BOND

Par Value     $1000      Coupon Interest Rate 6%      Tax bracket 20%

Cost              $ 930       Years to maturity 10

Answer the following questions.

a. calculate the before-tax cost of the Sony bond.

b. Calculate the after-tax cost of the Sony bond given David's tax bracket.

In order to get full points you must answer first and show your work. Thanks!!

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Before Tax Cost of Bond:

Nper = 10 Years

PMT = 1000*.06 = 60

PV = 930

FV = 1000

Before Tax Cost of Bond =Rate(10, 60, -930, 1000) = 7%

Part B:

After Tax Cost of Bond = 7*(1 - .20) = 5.6%

Thanks.

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