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22 March, 14:07

ABC has bonds outstanding that has 25 years left to maturity. The coupon rate is 9%, and coupons are paid semiannually. The bond is currently selling for $908.72 per $1,000 bond. What is the cost of debt

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  1. 22 March, 14:13
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    The cost of debt is 10.04%

    Explanation:

    The cost of debt is also another way of a yield to maturity of a bond so therefore we will calculate the yield to maturity for the following problem to get the cost of debt therefore using the following formula:

    Yield to maturity = [ (face value/current value) (1/period to maturity) ] - 1

    where the face value is $1000 the original bond price

    current value is the value of the bond which is $908.72 which its currently selling for.

    period to maturity is the period of which the bond took to mature which is not specified but we know a bonds price is valuated every year so it will be 1 year.

    now we substitute to the above mentioned formula:

    Yield to maturity = ($1000/$908.72) (1/1) - 1 then compute

    Yield to Maturity = 0.1004489832 then we multiply by 100 for percentage

    Yield to maturity = 10.04% rounded off to two decimal places,

    we know the cost of debt is the interest rate at which entities pay over their loans or debts, so in this case that is the yield to maturity of a bond therefore the cost of debt is 10.04%
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