Question

The Bet-r-Bilt Company has a 5-year bond outstanding with a 4.10 percent coupon. Interest payments are paid semi-annually. The face amount of the bond is $1,000. This bond is currently selling for 98 percent of its face value. What is the company's pre-tax cost of debt? 2.5 percent 10.0 percent 4.6 percent 4.1 percent 8.2 percent

Answer 1

Face Value = $1,000
Current Price = 98%*$1,000
Current Price = $980

Annual Coupon Rate = 4.10%
Semiannual Coupon Rate = 2.05%
Semiannual Coupon = 2.05%*$1,000
Semiannual Coupon = $20.50

Time to Maturity = 5 years
Semiannual Period to Maturity = 10

Let semiannual YTM be i%

$980 = $20.50 * PVIFA(i%, 10) + $1,000 * PVIF(i%, 10)

Using financial calculator:
N = 10
PV = -980
PMT = 20.50
FV = 1000

I = 2.276%

Semiannual YTM = 2 * 2.276%
Semiannual YTM = 4.552%

So, Before-tax Cost of Debt = 4.6%