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11 August, 16:27

The Lancaster State Bank is thinking about purchasing a corporate bond that pays a coupon of 8.5%. The bank has a marginal tax rate of 25%. What is the after-tax yield on this bond?

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  1. 11 August, 16:35
    0
    Answer: 6.375%

    Explanation:

    The Lancaster State Bank is thinking about purchasing a corporate bond that has a yield of 8.5%. This bank has a marginal tax rate of 25%.

    The after-tax yield on this bond would be 6.375%
  2. 11 August, 16:43
    0
    The after tax yield is 6.375%

    Explanation:

    The after tax yield is the amount of coupon rate after the tax deduction which will be calculated by this formula:

    ATY = i (1 - tax Rate)

    ATY is the after tax yield

    i is the coupon interest rate which is 8.5%

    tax rate is the marginal tax which will be adjusted on the rate given to give us the after tax yield so we substitute on the above formula:

    ATY = 8.5% (1 - 25%) then we compute on calculator

    ATY = 6.375% which is the after tax yield of this bond.

    thereafter you get the percentage yield which is the yield of a coupon adjusted for tax.
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