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The principal, coupon interest rate, and interest overlap period are shown in the following table for a number of bonds.
Bond
Principal
Coupon Interest Rate
Interest Overlap Period
A
$ 5,000,000
8.0%
3 months
B
40,000,000
7.0
2
C
50,000,000
6.5
3
D
100,000,000
9.0
6
E
20,000,000
5.5
1
a. Calculate the dollar amount of interest that must be paid for each bond during the interest overlap period.
b. Calculate the after-tax cost of overlapping interest for each bond if the firm is in the 40 percent tax bracket.
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