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V Inc's are trading at their par value of $1,000 and pay interest 4 times a...

V Inc's are trading at their par value of $1,000 and pay interest 4 times a year. If each interest payment is 19 what is V Inc component cost of debt?

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Answer #1

Cost of capital of a bond (debt) is its yield to maturity.
Now, as the bond is trading at par (at face value of $1000), the coupon rate=yield to maturity
As the bond is trading at par, current bond price=Face value of the bond=$1000
Interest payment of 19 is paid 4 times a year, total annual coupon payment=19*4=$76
Annual coupon interest rate=Annual coupon amount paid/Face value=$76/$1000=0.076 or 7.60%
So, yield to maturity or the component cost of debt=7.6%

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