You issued debt in the form of bonds, with a face value of $1,000, and have 9 years until maturity. The bonds have anannual coupon rate of 7.8%, which are paid semiannually. a. The current price is $1,100. What is the pretax cost ofdebt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g12.34.) b. The tax rate is 22%. What is the aftertax cost of debt? (Do not round intermediate calculations and enteryour answer as a percent rounded to 2 decimal places, e.g., 12.34.)

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Answered: You issued debt in the form of bonds,…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 9P

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You will be paying $12,200 a year in tuition expenses at the end of the next two years. Bonds currently yield 9%. Required: a. What are the present value and duration of your obligation? (Do not round intermediate calculations. Round "Present value" to 2 decimal places and "Duration" to 4 decimal places.) b. What is the duration of a zero-coupon bond that would immunize your obligation and its future redemption value? (Do not round intermediate calculations. Round "Duration" to 4 decimal places and "Future redemption value" to 2 decimal places.) c. Suppose you buy a zero-coupon bond with value and duration equal to your obligation. Now suppose that rates immediately increase to 10%. What happens to your net position, that is, to the difference between the value of the bond and that of your tuition obligation? (Enter your answer as a positive value. Do not round intermediate calculations. Round your answer to 2 decimal places.) d. Suppose you buy a zero-coupon bond with value…

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