Current cost of a bond: You know that the after-tax cost of debt capit

QUESTION

Current cost of a bond: You know that the after-tax cost of debt capital for Bubbles Champagne is 8.3 percent. If the firm has only one issue of five-year maturity bonds outstanding, what is the current price of the bonds if the coupon rate on those bonds is 11.86 percent? Assume the bonds make semi¦
Semiannual Bond. So each year has 2 periods SO nper = 5 yrs = 5*2 = 10 periods Coupon =11.86%. If Face value is $1000, Coupon = 11.86%*1000/2 = $59.30 Post Tax yield = 8.3% & Tax rate is 30%. S0 Pre Tax yield = 8.3%/(1-30%) = 11.86% ¦¦¦¦¦Ans (1) So Semiannual¦

d = 11.86%/2 = 5.93% So current price of Bond = PV(Rate,nper,PMT,FV) = PV(5.93%,10,59.30,1000) = $1,000 ¦¦¦¦¦..Ans (2) As Yield = Coupon, Bonds Current price = Bonds Face value

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