Muscle motors is looking to issue a 10 years bond with annual Payment coupon pay
ID: 2737851 • Letter: M
Question
Muscle motors is looking to issue a 10 years bond with annual Payment coupon payment. Park value of the bond is 1,000. The real rate is 1.5%. The economy is growing slowly but steadily and so inflation expectations are 1.75%. The companysecond credit rating is BBB+ credit spreads for BBB+ debt are currently 3.75%
What's the risk free (gov.t-bill) rate?
If muscle motors marginal tax is 35% What is after tax cost of debt price( ignoring any floatation & issuance cos)t?
If the coupon rate on muscle motors bond issue is 7.0% what's the issue price ignoring any issuance cost?
Prior is issue, interest rate rose by 1.25% what's the price of the bond assuming the 7% coupon?
Explanation / Answer
a) The risk free (gov.t-bill) rate = Real rate + Inflation
= 1.5 + 1.75
= 3.25 %
b) The after tax cost of debt = 3.25 * (1 - 0.35) = 3.25 * 0.65 = 2.1125 %
c) Assuming the coupon rate of bond equals to Yield to Maturity (YTM), thus bond is carrying at Par Value of $ 1000. Accordingly, the issue price of bond is $ 1000.
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