The market price of a bond is $1129 (Face Value = 1000). It has 14 years to maturity and pays an annual coupon of $100 in semi-annual installments. What is the effective annual cost of debenture capital before tax (kd)?
Please help to explain how to do this, should I use D1/P0 + G? *but i couldnt figure out the growth rate.
|The before tax cost of capital of debenture capital is the|
|YTM (Yield to maturity) of the debenture.|
|The YTM is the internal rate of return of the cash flows|
|associated with the debenture.|
|The cash flows from the bond are:|
|*Outflow, being the market price of the bond of $1129.|
|*The inflow would consist of the MV of $1000 and the|
|semi-annual coupons of $50.|
|The YTM is that discount rate which equates the price|
|of the debenture of $1129 with the PV of the Maturity value|
|and the PV of the semi annual interest payments.|
|1129 = 1000*PVIF(r,28)+50*PVIFA(r,28)|
|The value of r (YTM/2) is to be found by trial and error or by|
|using a financial calculator.|
|Using a financial calculator YTM = 8.41%|
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