Question

MC algo 12-7 Pretax Cost Of Debt Too Young, Inc., has a bond outstanding with a coupon rate of 6.9 percent and semiannual payments. The bond currently sells for $1,905 and matures in 15 years. The par value is $2,000. What is the company's pretax cost of debt? Multiple Choice 7.51% 3.65% 7.98% 7.72% 7.43%

Answer 1

The Approximate Yield to Maturity Formula =[Coupon + ( Face Value - Market Price) / Number of years to maturity] / [( Face Value + Market Price)/2 ] *100

= [$ 69 + ( $ 2,000- $1905 ) /30] /[( $ 2,000+ $ 1905 )/2] *100

=72.166667/ 1952.50*100

= 3.69611609%

Annual Yield to maturity = 3.69611609% * 2

= 7.39%

Note : Coupon = Rate * Face Value

= 6.9% / 2* $ 2,000

= $ 69

Since this formula gives an approximate value, the financial calculators can be used alternatively.

where,

Par Value = $ 2,000

Market Price = $  1905

Annual rate = 3.45% and

Maturity in Years = 30 Years

Hence the yield to maturity Semi Annual= 3.715%

Hence the yield to maturity Annual = 3.715% *2

= 7.43%

Hence the correct answer is 7.43%