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What is the interest rate needed on a $1,000 face value, 6%-(Answered)

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Question

What is the interest rate needed on a $1,000 face value, 6% coupon corporate bond to make it equivalent in terms of return to one whose interest rate is tax free? Assume the corporate tax rate is 40%.?


1

 


 

Annual After tax return on corporate bond is value of the bond *tax rate *interest rate

 

1000*0.4*0.06=24

 

Tax free

 


 

1000*0.06=60

 


 

60r=24

 

R=24/60

 

R=0.4 or 40%

 


 

 

Paper#9256750 | Written in 27-Jul-2016

Price : $16
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