For each of the following $1,000par value bonds, assuming annual interest payment and a 40% tax rate,
Question:
For each of the following $1,000par value bonds, assuming annual interest payment and a 40% tax rate, calculate the aftertax cost to maturity using the approximation formula.
MaturityMaturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
Discount (r Coupon Bond Life (years) Underwriting fce premium (+) intcrest ratc $20 +10 15 $25 20 16 15 2.5 9% 10 12 30 15 20 60
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Basic Bond A Bon...View the full answer
Principles Of Managerial Finance
ISBN: 9780136119463
13th Edition
Authors: Lawrence J. Gitman, Chad J. Zutter
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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