Webb Street Books has a $130,000 bond issue outstanding. These bonds have an 8% coupon, pay interest semiannually, and have a current market price equal to 101.5% of face value. The tax rate is 35%. What is the amount of the annual interest tax shield?

Question

Quizplus · Accepted Answer

The annual interest payment on the bonds is 8% of $130,000, which equals $10,400. The interest tax shield is the interest payment times the tax rate, so $10,400 * 35% = $3,640.

Webb Street Books Has a $130,000 Bond Issue Outstanding