Answer: Default risk differences.
Explanation:
The Default risk is the inherent risk a lender faces that a borrower will not pay them back the debt they want to borrow. The lender will therefore charger a high return to cater for this risk. The higher the risk, the higher the return charged.
T-bonds have no default risk because they are guaranteed by the US Government which is why it's rate is the lowest. For the other bonds, there is something called a Credit rating. Bonds are usually rated on how risky it will be to lend to the company borrowing with AAA being of the lowest risk. Therefore as one goes up from AAA, the bonds will have higher default risks.
<span>anonymous 2 years ago</span><span>A company launched four new products. The market price, in dollars, of the four products after different number of years is shown below:
The price of which product will eventually exceed all others?</span>
Answer: After-tax cost of debt is 7.8%.
Explanation:
Given that,
coupon = 10% (outstanding bonds)
yield to maturity (YTM) = 12%
marginal tax rate = 35%
The after-tax cost of debt:
After-tax cost of debt = YTM (1 - Tax rate)
= 12% (1 - 0.35)
= 0.12 (0.65)
= 0.078
= 7.8%
YTM is used in the after-tax calculation because it represents the true pre-tax cost of debt to the issuer.
Therefore, the after-tax cost of debt is 7.8%
