Question

Tango Enterprises has issued 100,000 coupon bonds, with maturity of 10 years. Each bond sells for $1,060. The bonds pay semi-annual coupons of 8% on face value of $1,000. What is Tango’s cost of debt?

a. 3.29%

b. 3.57%

c. 6.57%

d. 7.15%

e. 7.28%

Answer 1

Answer is Option d. 7.15%

We need to calculate the YTM on this bond. Exact YTM calculation is possible only on Excel or Financial Calculator. For manual calculation, we need to calculate the approximate YTM. Both of the methods are shown below:

YTM Aproximation formula:

C = 8% * $1000/2 = $40 (semi-annual), F = $1000, P = $1060, n = 10 * 2 = 20 (semi-annual periods).

Substituting the values, we get:

YTM Approx = 3.59% --> Semi-annual

Hence, YTM Approx (Annual) = 3.59% * 2 = 7.18%--> Close to Option d, that is the answer

Excel calculation: