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# Finance, Bonds

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1.
An investor recently purchased a corporate bond that yields 9%. The investor is in the 36% combined federal and state tax bracket. What is the bond's after-tax yield?

2.
Corporate bonds issued by Johnson Corporation currently yield 8%. Municipal bonds of equal risk currently yield 6%. At what tax rate would an investor be in different between these two bonds?

3.
Little Books Inc. recently reported \$3 million of net income. Its EBIT was \$6 million, and its tax rate was 40%. What was its interest expense? (Hint: Write out the headings for an income statement and then fill in the known values. Then divide \$3 million net income by 1 ? T = 0.6 to find the pre-tax income. The difference between EBIT and taxable income must be the interest expense. Use this same procedure
to work some of the other problems.)

4.
Kendall Corners Inc. recently reported net income of \$3.1 million and depreciation of \$500,000. What was its net cash flow? Assume it had no amortization expense.

#### Solution Preview

An investor recently purchased a corporate bond that yields 9%. The investor is in the 36% combined federal and state tax bracket. What is the bond's after-tax yield?
An investor recently purchased a corporate bond which yields 9 percent. The investor is in the 36 percent combined federal and state tax bracket. What is the bond's after-tax yield?

The bonds after tax yield is given as Pre tax yield X (1-tax rate)
After Tax Yield = 9% X (1-0.36) = 9%X0.64=5.76%
2.
Corporate bonds ...

\$2.49