Question

Company X issues 11% bonds of INR. 100 for an amount aggregating INR. 200,000 at 10% premium, redeemable at par after 5 years. Corporate tax rate is 35%. The cost of bonds would be:
Select one:
a. 0.06
b. 0.052
c. 0.05
d. 0.049
Please select a right option​

Answer 1

Answer:

0.06

Explanation:

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Answer 2

Concept:

The formula to calculate the price of bond is-

Kd=[I (1-t)+(RV-NP)/n]/(RV+NP)/2

Where,

I= Interest

t=tax

RV=Redemption Value

NP=Net Proceeds at the time of issue

n= years

Given:

I = 11 , (11% of 100)

t= 0.35

RV= 100 , (at par)

NP= 110 , (100 face value + 10% premium)

Find: the cost of the bond

Solution:

By using the values given in the formula above we get,

Kd=[11 (1-0.35)+(100-110)/5]/(100+110)/2

Kd=7.15+ (2)/105

Kd=5.15/105

Kd=0.049

Hence, we can conclude that the cost of Bond is 0.049, therefore the Option D is the correct option.

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