Question

Question 35

Ernst's Electrical has a bond issue outstanding with ten years to maturity. These bonds have a $1,000 face value, a 5 percent coupon, and pay interest annually. The bonds are currently quoted at 110 percent of face value. What is Ernst's pre-tax cost of debt?

Select one:

a. 4.40 percent

b. 3.33 percent

c. 3.78 percent

d. 4.53 percent

e. 3.47 percent

Answer #1

**c. 3.78 percent**

**Working:**

Current price of bonds | = | $ 1,000 | x | 110% | = | $ 1,100 | |||

Annual Coupon interest | = | $ 1,000 | x | 5% | = | $ 50 | |||

face Value | = | $ 1,000 | |||||||

Years to maturity | = | 10 | |||||||

Yield to Maturity | =rate(nper,pmt,-pv,fv) | Where, | |||||||

=rate(10,50,-1100,1000) | nper | 10 | |||||||

= 3.78% |
pmt | $ 50 | |||||||

pv | $ 1,100 | ||||||||

fv | $ 1,000 | ||||||||

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