535-WEEK2HMK #1

(2-1)  PLEASE ANSWER BELOW
Personal After-Tax Yield 
  2.  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? PLEASE EXPLAN IN DETAIL


NOTE: Most debt is raised directly from lenders without the use of investment bankers; hence no flotation costs are incurred. However, a debt flotation cost adjustment should be made if large flotation costs are incurred. We reduce the bond’s issue price by the flotation expenses, reduce the bond’s cash flows to reflect taxes, and then solve for the after-tax yield to maturity.