Question

Your company’s bonds are priced at $978 per $1,000 of par value. The coupon rate is 4.3%, paid semi-annually. There are 13 payments remaining to maturity. Your tax rate is 21%. What is your company’s cost of debt?

Answer 1

Face Value = $1,000
Current Price = $978

Annual Coupon Rate = 4.30%
Semiannual Coupon Rate = 2.15%
Semiannual Coupon = 2.15% * $1,000
Semiannual Coupon = $21.50

Time to Maturity = 6.50 years
Semiannual Period to Maturity = 13

Let Semiannual YTM be i%

$978 = $21.50 * PVIFA(i%, 13) + $1,000 * PVIF(i%, 13)

Using financial calculator:
N = 13
PV = -978
PMT = 21.50
FV = 1000

I = 2.348%

Semiannual YTM = 2.348%
Annual YTM = 2 * 2.348%
Annual YTM = 4.696%

Before-tax Cost of Debt = 4.696%

After-tax Cost of Debt = Before-tax Cost of Debt * (1 - Tax Rate)
After-tax Cost of Debt = 4.696% * (1 - 0.21)
After-tax Cost of Debt = 3.71%