The principal, coupon interest rate, and interest overlap period are shown in the following table for a number of bonds.
|
Bond
|
Principal
|
Coupon
Interest Rate
|
Interest
Overlap Period
|
|
A
|
$ 5,000,000
|
8.0%
|
3 months
|
|
B
|
40,000,000
|
7.0
|
2
|
|
C
|
50,000,000
|
6.5
|
3
|
|
D
|
100,000,000
|
9.0
|
6
|
|
E
|
20,000,000
|
5.5
|
1
|
a. Calculate the dollar amount of interest that must be paid for each bond during the interest overlap period.
b. Calculate the after-tax cost of overlapping interest for each bond if the firm is in the 40 percent tax bracket.