Question

Barkie’s Pharmacutical Co. has an outstanding bond that sells in the market for $890. The bonds mature in 11 years, pay interest semiannually, and carry a 7% coupon rate on $1,000 par value. What is Barkies’ cost of debt?

Group of answer choices

10.51%

21.02%

5.22%

10.43%

5.25%

Answer 1

Price of bond = 890

Face Value = 1000

Coupon rate = 7%

Semi-annual Coupon = 0.07*1000/2 = 35

Number of payments = 11*2 = 22

Price of the bonds = Present value of all semi-annual coupons and Face value discounted at semi-annual YTM.

890 = 35/(1+sy)^1 + 35/(1+sy)^2 + 35/(1+sy)^3 + 35/(1+sy)^4 + 35/(1+sy)^5 + 35/(1+sy)^6 +.............. 35/(1+sy)^22 + 1000/(1+sy)^22

We will use heat and trial method to get that value for which above equation satisfies.

sy = 4.28%

Cost of debt = YTM = 4.28 * 2 = 8.56% Answer

There seems to be some problem with the options.