Question

BP has a bond outstanding with 15 years to maturity, a $1,000 par value, a coupon rate of 6.8%, with coupons paid semiannually, and a price of 91.25 (percent of par).

What is the cost of debt?

Answer 1

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

= [$ 34+ ( $ 1,000- $ 912.50) /30] /[( $ 1,000+ $ 912.50)/2] *100

= 36.9166667/956.25*100

= 3.860566449%

Annual YTM =3.860566449%*2

= 7.72%

Note : Semi Annual Coupon = Rate/2 * Face Value

= 6.8%/2 * $ 1,000

= $ 34

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

where,

Par Value = $ 1,000

Market Price = $ 1000*91.25%

= $ 912.50

Annual rate = 6.8% and

Maturity in Years = 15 Years

Payments = 2

Hence the yield to maturity = 7.80%

Answer = 7.80%