Finance and Investment Analysis: Key Concepts and CalculationsHomework 28 questions1.If the coupon rate is less than the yield to maturity, the bond will:a. sell at parb. sell at premiumc. sell at discount2. ABC Inc. issuedtwelve-year, 6 percent semi-annual coupon bonds at par. Today, the bondsare priced at $1112. What is the firm’s after-tax cost of debt if the tax rate is 30%?Answer:To determine the after-tax cost of debt, we need to follow a few steps.Step 1: Calculate the Yield to Maturity (YTM)The bond price today is $1,112, and it was issued at par (face value = $1,000). The coupon rate is 6%,which means the bond pays $60 annually in interest (6% of $1,000), or $30 semi-annually.•Face value (FV)= $1,000•Coupon rate= 6% (annual), or 3% semi-annually•Semi-annual coupon payment= $30•Current price= $1,112•Number of periods (n)= 12 years × 2 = 24 semi-annual periodsWe can use a financial calculator or an approximation method to find the yield to maturity (YTM). Theformula for YTM on a semi-annual basis is:P=∑t=1nC(1+YTM/2)2t+FV(1+YTM/2)nP =\sum_{t=1}^{n}\frac{C}{(1 + YTM/2)^{2t}} +\frac{FV}{(1 +YTM/2)^{n}}Where:•PP is the current bond price ($1,112)•CC is the semi-annual coupon payment($30)Preview Mode
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