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1) Abner? Corporation's bonds mature in 16 years and pay 13 percent interest annually
1) Abner? Corporation's bonds mature in 16 years and pay 13 percent interest annually. If you purchase the bonds for ?$1,100?, what is your yield to? maturity?
2) If a corporation faces a tax rate of 21? percent, the after−tax cost of debt for a 15−?year, 12? percent, $1,000 par value? bond, selling at? $950 is.......?
3) Mr. Miller has some personal questions for himself. His first question runs like this:
He desires to finance the purchase of a $25,000 priced vehicle through your bank. Your bank is willing to offer Mr. Miller a loan for the entire amount at 9% interest (APR) per annum. The loan is repayable in 50 equal monthly payments.
The monthly payment for Mr. Miller is....?
Expert Solution
1) We can calculate the yield to maturity by using the following formula in excel:-
=rate(nper,pmt,-pv,fv)
Here,
Rate = Yield to maturity
Nper = 16 periods
Pmt = Coupon payments = $1,000*13% = $130
PV = $1,100
FV = $1,000
Substituting the values in formula:
= rate(16,130,-1100,1000)
= 11.60%
2) We can calculate the pretax cost of debt by using the following formula in excel:-
=rate(nper,pmt,-pv,fv)
Here,
Rate = Pretax cost of debt
Nper = 15 periods
Pmt = Coupon payments = $1,000*12% = $120
PV = $950
FV = $1,000
Substituting the values in formula:
= rate(15,120,-950,1000)
= 12.76%
After tax cost of debt = Pretax cost of debt * (1 - Tax rate)
= 12.76% * (1 - 21%)
= 10.08%
3) We can calculate the monthly payments by using the following formula in excel:-
=pmt(rate,nper,-pv,fv)
Here,
Pmt = Monthly payments
Rate = 9%/12 = 0.75% (monthly)
Nper = 50 periods (monthly)
PV = $25,000
FV = $0
Substituting the values in formula:
= pmt(0.75%,50,-25000,0)
= $601.45
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