The principal, coupon interest rate, and interest overlap period are shown in the following table for five
Question:
The principal, coupon interest rate, and interest overlap period are shown in the following table for five different bonds.
Calculate the dollar amount of interest that must be paid for each bond during the interest overlap period.
Calculate the after-tax cost of overlapping interest for each bond if the firm is in the 40% tax bracket.
Interest Coupon Interest Rate 8.0% 7.0 6.5 9.0 5.5 Bond Principal 5,000,000 40,000,000 50,000,000 Overlap Period 3 months 100,000,000 20,000,000
Step by Step Answer:
Interest payable during overlap Coupon rate x Principal x Months overlap 12 Aftertax cost of overla...View the full answer
Introduction to Corporate Finance What Companies Do
ISBN: 978-1111222284
3rd edition
Authors: John Graham, Scott Smart
Related Video
Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.
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