Question

Use the information below to determine before tax-costs of debt financing of bond S:

Selling price: $1065

Number of years to maturity: 17

Annual Coupon Rate, paid annually: 16.48%

Par Value: 1000

Floatation Cost: $4.25

Answer 1

Face Value, FV = 1000
Coupon Interest Rate = 16.48% Annually
Coupon Payment = 16.48% of 1000 = $ 164.8 each Year
Period = 17 Year
Current Price = $ 1065 - 4.25 = 1060.75

Current Price = Present Value of 17 coupon payments each year + Present Value of Maturity Face Value after 17 Years

Current Price = 164.8/(1+i)¹ + 164.8/(1+i)² + 164.8/(1+i)³ .............. + 164.8/(1+i)¹⁷ + 1000/(1+i)¹⁷
1060.75 = 164.8/(1+i)¹ + 164.8/(1+i)² + 164.8/(1+i)³ .............. + 164.8/(1+i)¹⁷ + 1000/(1+i)¹⁷

Now, one has to solve this to find "i" to find YTM, it is difficult to solve it directly,
one has to either use financial calculator or excel,
Please refer below image to understand how to solve using excel

So, i = 15.45% Annually

Before tax-costs of debt financing of bond S = 15.45%