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Compute the yield to maturity on the old issue

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Question - Octopus Transit has a $1,000 par value bond outstanding with 10 years to maturity. The bond carries an annual interest payment of $108, payable semiannually, and is currently selling for $1,107. Octopus is in a 20 percent tax bracket. The firm wishes to know what the after tax cost of a new bond issue is likely to be. The yield to maturity on the new issue will be the same as the yield to maturity on the old issue because the risk and maturity date will be similar.

Required -

a. Compute the yield to maturity on the old issue and use this as the yield for the new issue.

b. Make the appropriate tax adjustment to determine the after tax cost of debt.

Reference no: EM132573451

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