Question

Suppose a corporation issued a 30 year annual 8% bond 10 years ago the bond is...

Suppose a corporation issued a 30 year annual 8% bond 10 years ago the bond is currently selling for 95% of its face value or $950 orders the corporation's cost of debt

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Answer #1

Corporation's cost of debt

Corporation's cost of debt is the Yield to Maturity (YTM) of the Bond

The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)

Variables

Financial Calculator Keys

Figure

Face Value [$1,000]

FV

1,000

Coupon Amount [$1,000 x 8%]

PMT

80

Yield to Maturity [YTM]

1/Y

?

Time to Maturity [30 Years – 10 Years]

N

20

Bond Price [-$950]

PV

-950

We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the yield to maturity (YTM) on the bond = 8.53%

“Hence, the Corporation's cost of debt will be 8.53%”

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