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              $ 920       Years to maturity 10

Answer the following questions.

a. calculate the before-tax cost of the Sony bond using the bonds yield to maturity (answer must be %)

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

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

Explanation / Answer

a) YTM = (60 + 80/10) / 960 = 7.08%

b) After Tax = 7.08% (1-0.20) = 5.67%

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