David Abbot is interested in purchasing a bond issued by Son

?David Abbot is interested in purchasing a bond issued by Sony. He has obtained the following information on the? security: Sony Bond Par value ? $1000 Coupon interest rate 8.0?% Corporate tax rate 25?% Cost??????????$910 Years to maturity 10??

Solution

Par Value = $1000

Coupon interest rate = 8%

Coupon amount = 1000*8% = 80

Tax rate = 25%

Price of Bond = $910

Years to maturity (n) = 10

Yield to maturity = [Coupon amount(1 - tax rate) + (Par value - Price of Bond)/ Years to maturity] / (Par value + Price of Bond)/2

= [80(1-0.25) + (1000 - 910)/10] / (1000 + 910)/2

= [60 + 9]/955 = 69/955 = 0.0722 = 7.22%

Actual yield from bond is 7.22%