Question

How to find cost of debt? Please show me how to find the cost of debt with the variables given- Years left until maturity- 20 years Coupon rate- 5.5% Semiannually? yes Selling price- $131.50 Thanks!

Answer 1

Face Value = $100
Current Price = $131.50

Annual Coupon Rate = 5.50%
Semiannual Coupon Rate = 2.75%
Semiannual Coupon = 2.75% * $100
Semiannual Coupon = $2.75

Time to Maturity = 20 years
Semiannual Period to Maturity = 40

Let Semiannual YTM be i%

$131.50 = $2.75 * PVIFA(i%, 40) + $100 * PVIF(i%, 40)

Using financial calculator:
N = 40
PV = -131.50
PMT = 2.75
FV = 100

I = 1.665%

Semiannual YTM = 1.665%
Annual YTM = 2 * 1.665%
Annual YTM = 3.33%

Before-tax Cost of Debt = 3.33%