Question

What is the formula to calculate market interest for a bond? And how do you calculate cost of debt?

Answer 1

a) Market Interest for Bond:

Market interest rate is also referred as current yield on the bond. It measures the current income from the bond as a percentage of its current price.

CY = Ci / Pm

CY = the current yield on a bond’

Ci = the annual coupon payment of Bond i

Pm = the current market price of the bond

b) Cost of Debt:

Kd = Ci / P

Kd = Cost of Debt

Ci = the annual coupon payment of Bon i

P = Face value of Debt

Let us assume that you paid $ 1200 to buy a bond with face value of $1000 paying annual coupon of $ 150.

Market Interest Rate = 150 / 1200 = 12.5 %

Cost of Debt = 150 / 1000 = 15%