A Company Is Issuing $1,000 Bonds at Par Value

A company is issuing $1,000 bonds at par value. The coupon rate (and yield to maturity) on the bonds is 8 percent (with annual payments) and the bonds will mature in 10 years. The bonds can be called at a call premium of 5 percent above face value after 3 years. What is the after-tax yield to call for an investor with a 31 percent tax rate?

A) 5.52%
B) 5.90%
C) 6.60%
D) 7.07%
E) 9.52%

Correct Answer:

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