Young Inc has a bond outstanding with a coupon rate of 64 pe

Young, Inc, has a bond outstanding with a coupon rate of 6.4 percent and semiannual payments. The bond currently sells for $945 and matures in 21 years. The par value is $1,000. whet s the company\'s pretax cost of debt? 340% 744% 0690% 700% 720%

Solution

Solution: Answer is 3rd option 6.90% Working Notes: The company\'s pre tax cost of debt is the YTM of the Bond. As the bond is paying coupon semi annually , its Ytm can be calculated by Excel or financial calculator First we get the semi annual YTM No. of period = years to maturity x no. of coupon in a year = 21 x 2 =nper = N = 42 Face value of bond = FV= $1,000 Price of the bond = PV = -$945 Semi-annual Coupon amount = PMT = coupon rate x face value/2 = 6.4% x $1,000 /2= $32 Now, For calculation YTM by excel type above data in below format =RATE(N,pmt,PV,FV) =RATE(42,32,-945,1000) 0.034498673 =3.4498673% =3.45% The YTM calculated is semi annual Cost of debt pre tax = Semi annual YTM x 2 Cost of debt pre tax = 3.4498673% x 2 Cost of debt pre tax = 6.8997346 % Cost of debt pre tax = 6.90 % The above YTM can be calculated by financial calculator also Please feel free to ask if anything about above solution in comment section of the question.