Question

Notable Nothings plans to issue new bonds with the same yield as its existing bonds. The existing bonds have a coupon rate of interest equal to 5.6 percent (semiannual interest payments), 12 years remaining until maturity, and a $1,000 maturity value; they are currently selling for $918 each. SHOW ALL WORK

(a) If Notable issues new bonds today, what will be its before-tax cost of debt?

(b) What will be its before-tax cost of debt if the price of its existing bonds is $730 when Notable issues the new bonds?

Answer 1

Par Value of the bonds (FV) = $ 1000

Annual coupons = 5.6% * 1000 =$ 56

Semi-annual coupons (PMT) = 56/2 = $ 28

Periods to maturity (nper) = 12*2 = 24 periods

a)

Price of the security(PV) = $ 918

Before tax cost of debt (YTM) = = 3.3% per half year = 6.6% pa

2)

Price of the bond (PV) = $ 730

Before tax cost of debt (YTM) = = 4.7% per half year = 9.4% pa