Question

Kenny Enterprises has just issued a bond with a par value of $1,000, a maturity of twenty years, and a coupon rate of 12.3% with semiannual payments. What is the cost of debt for Kenny Enterprises if the bond sells at the following prices? What do you notice about the price and the cost of debt?

a.$951.17

b.$1000.00

c.$1067.87

d.$1156.76

Answer 1

a.	Cost of debt	=rate(nper,pmt,pv,fv)*2
		= 12.99%
Where,
nper	=	20*2	=	40
pmt	=	1000*12.3%*6/12	=	61.50
pv			=	-951.17
fv			=	1,000.00
b.	Cost of debt	=rate(nper,pmt,pv,fv)*2
		=12.30%
Where,
nper	=	20*2	=	40
pmt	=	1000*12.3%*6/12	=	61.50
pv			=	-1,000.00
fv			=	1,000.00
c.	Cost of debt	=rate(nper,pmt,pv,fv)*2
		=11.43%
Where,
nper	=	20*2	=	40
pmt	=	1000*12.3%*6/12	=	61.50
pv			=	-1,067.87
fv			=	1,000.00
d.	Cost of debt	=rate(nper,pmt,pv,fv)*2
		=10.42%
Where,
nper	=	20*2	=	40
pmt	=	1000*12.3%*6/12	=	61.50
pv			=	-1,156.76
fv			=	1,000.00
Note:
	Price	Cost of debt	Coupon Rate
	951.17	12.99%	12.30%
	1,000.00	12.30%	12.30%
	1,067.87	11.43%	12.30%
	1,156.76	10.42%	12.30%
	Coupon Rate is always same.
	Cost of debt depends upon price of bond.
	When bonds are issued at Par, Cost of debt is equal to its coupon rate.
	When Bonds are issued below par then cost of debt is higher than coupon rate.
	When Bonds are issued above par then cost of debt is lesser than coupon rate.
	Cost of debt is decreasing as price increases.
	Coupon and Maturity value (Face Value) is always same.
	So, outflows is same in all case.
	Price of bond is the inflow for issuer.
	So, when issuer of bonds receives higher amount for same amount of outflow(Coupon and Face Value), cost of issuing bond will decrease.