A bond has a face value of $1,000. It has a maturity of 20 years and a coupon rate of 9%. The bond pays interest semiannually. The yield on the bond is 10%. Assuming a 30% tax rate, what is the after tax cost of this bond, for purposes of calculating the company's WACC?

Question

Kathy

Business

17 December, 20:00

A bond has a face value of $1,000. It has a maturity of 20 years and a coupon rate of 9%. The bond pays interest semiannually. The yield on the bond is 10%. Assuming a 30% tax rate, what is the after tax cost of this bond, for purposes of calculating the company's WACC?

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Answers (1)

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Weston Jennings · Answer 1

After tax cost of bond = 7%

Explanation:

In order to find the after tax cost of bond we need to know its pre tax cost of debt. The yield on a bond is its pre tax cost. In this question we are already given the yield which is 10%. This means that the pre tax cost of debt is 10%. Now in order to find the after tax cost of debt we will multiply the pre tax cost of debt by (1-tax Rate)

After tax cost of bond = 0.1 * (1-0.3) = 0.07 = 7%