Answer:
8.23%
Explanation:
Since this bond pays semi-annual coupons, it means that the payments occur every 6 months; making it 2 periods per year. Using a Financial calculator; enter the following inputs. If using TI BA II plus, key in the number first, then the function.
Total duration; N = 9*2 = 18
Face Value ; FV = 1,000 (use 1,000 if the value is not given)
Present value or price ; PV = -754.08
Semiannual Coupon Payment; PMT = Semiannual coupon rate *Face value
Semiannual Coupon Payment; PMT = (7.25%/2) *1000 = 36.25
The Yield to maturity;YTM is the <em>annual</em> pretax I/Y which is the Pretax cost of debt in this case
therefore, CPT I/Y = 5.875% (note: semi-annual rate)
Next, convert the semiannual rate to annual rate i.e the YTM;
= 5.875%*2
Pretax cost of debt (YTM) = 11.75%
Aftertax cost of debt = Pretax cost of debt (1-tax)
= 0.1175% (1-0.30)
= 0.08225 or 8.23%
