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%

Please Discuss in case of Doubt

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