Question

Hi there,

Just wondering how you would find the cost of debt of long-term corporate bonds based on the yield to maturity (YTM)?

Thanks for your time.

Answer 1

Cost of debt using the YTM approach:

One of the approaches of finding the cost of debt is the YTM approach. If a company is public, it can have observable debt in the market. For example we can take the example of straight bond that makes interest payments regularly & pays back the principal at maturity. This is a widely used approach when the company has a simple capital structure, where it doesn’t have multiple tranches of debt including senior debt for example with each having different interest rates.

Cost of debt of a bond

PV = PV of par value + PV of coupon payments

PV = coupon1 + coupon2 + coupon3

      (1+YTM)^1 (1+YTM) ^2 (1+YTM) ^3

Where PV is the price of the bond & FV is the face value

Solve for YTM & the cost of debt is the YTM