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