Question

# You are analyzing the after-tax cost of debt for a firm. You know that the firm’s...

You are analyzing the after-tax cost of debt for a firm. You know that the firm’s 12-year maturity, 10.25 percent semiannual coupon bonds are selling at a price of \$1,028.51. If these bonds are the only debt outstanding for the firm. What is the current YTM of the bonds?

YTM calculation can be done manually (approximate value) or through Excel or Financial Calculator (Exact).

For approximate manual calculations:

where Approx YTM is periodic for periodic coupon C, Face value F, Price P and n periods to maturity.

For C = 10.25%/2 * 100 0 = \$51.25 --> semi-annual coupon

F = \$1000

P = \$1,028.51

n = 12 * 2 = 24 semi-annual periods

Approx YTM = 50.0621/1014.255

Approx YTM = 4.94% --> Semi-annual YTM

Approx YTM = 2 * 4.94% = 9.87% --> Annual YTM

For Financial Calculator:

use inputs - PMT = 51.25, N = 24, PV = -1028.51, FV = 1000, compute i/Y.

i/Y = 4.92% --> Semi-annual. Multiply this by 2 for Annual YTM = 9.84%

#### Earn Coins

Coins can be redeemed for fabulous gifts.