Question

2. Calculate the annual cost of debt for the following semi-annual bond. The years left to maturity is 12 years, the coupon rate is 6% and the coupons are paid semi-annually. The face (par) value is $1,000 and the bond currently sells for $976.

Answer 1

semiannual interest = 1000 *.06 *6/12 = 30

semiannual months =12 * 2 = 24

Yield to maturity = [Interest + (face value -price )/semiannual months ]/[(face value +price) /2]

         =[30 + (1000-976 )/ 24 ]/[(1000+976 )/2]

        = [30 + (24/24)] /[1976/2]

        = [30 +1 ] /988

         = 31/ 988

           = .0314 or 3.14%

Annual cost of debt = 3.14*2 = 6.28%