Vipsu Corporation plans to issue 10-year bonds with a par value of $1,000 that will pay $55 every six months. The net amount of capital to the firm from the sale of each bond is $840.68

If Vipsu is in the 25% tax bracket, what is the after-tax cost of debt?

Answer: Find the present value factors that equate
$840.67 = $55(PVIFA, 20, r/2) + $1,000(PVIF, 20, r/2)
r = 0.14
kd = 14(1 - 0.25) = .105 = 10.5%
In this answer the six month rate has been doubled to get 14%. If the investor demands a 6 month rate of 7%, the investor will demand (l.07 squared) - 1 or 14.5%.