Question

Too Young, Inc., has a bond outstanding with a coupon rate of 6.2 percent and semiannual payments. The bond currently sells for $1,954 and matures in 22 years. The par value is $2,000. What is the company's pretax cost of debt?

Answer 1

Information provided:

Par value= future value =$2,000

Current price= present value= 1,954

Coupon rate= 6.2%/2= 3.05%

Coupon payment= 0.0305*2,000= $62

Time= 22 years*2= 44 semi-annual periods

The pretax cost of debt is calculated by entering the below in a financial calculator:

FV= 2,000

PV= -1,954

PMT= 62

N= 44

Press the CPT key and I/Y to compute the pretax cost of debt.

The value obtained is 3.1981

Therefore, the pretax cost of debt is 3.1981%*2= 6.3962% 6.40%.

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