Question

Cost of debt.   Kenny Enterprises has just issued a bond with a par value of ​$1,000​, a maturity of twenty​ years, and a coupon rate of 8.7​% with semiannual payments. What is the cost of debt for Kenny Enterprises if the bond sells at the following​ prices? What do you notice about the price and the cost of​ debt? a.   ​$967.91 b.   ​$1,000.00 c.   ​$1,055.87 d.   ​$1,132.33 a.  What is the cost of debt for Kenny Enterprises if the bond sells at ​$967.91​? b.  What is the cost of debt for Kenny Enterprises if the bond sells at ​$1,000.00​? c.What is the cost of debt for Kenny Enterprises if the bond sells at ​$1,055.87​? nothingm​% ​ (Round to two decimal​ places.) d.  What is the cost of debt for Kenny Enterprises if the bond sells at ​$1,132.33​?

Answer 1

Coupon = 8.7%*1000/2 = 43.50
Par value = 1000
Number of Periods = 20*2 = 40
a ) Price = 967.91
Cost of Debt using excel function = 2*RATE(40,43.50,-967.91,1000) = 9.05%

b) Price = 1000
YTM and Coupon rate are same = 8.7%

c) Price = 967.91
​​​​​​​Cost of Debt using excel function = 2*RATE(40,43.50,-1055.87,1000) = 8.13%

d) Price = 1132.33
​​​​​​​Cost of Debt using excel function = 2*RATE(40,43.50,-1132.33,1000) = 7.42%

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