Question

Too Young, Inc., has a bond outstanding with a coupon rate of 6.8 percent and semiannual payments. The bond currently sells for $949 and matures in 25 years. The par value is $1000. What is the company's pretax cost of debt?

Question 5 options:

	A) 7.60%
	B) 7.85%
	C) 7.39%
	D) 7.24%
	E) 3.59%

Answer 1

What is the company's pretax cost of debt?

Answer: E) 3.59%

Formula for calculating pretax cost of debt or YTM

F (i.e. Face value) = $1000

P (i.e. current price) = $949

N = 50 period (I.e. 25 years * 2periods per year)

C (i.e. coupon) = 1000 * coupon rate

                   = $1000 * 3.4%

                   = $34

Coupon rate: Since bond coupons are paid semiannually,

Coupon rate = 6.8%* (6/12)

                   =3.4%

                            

=$35.02 ÷ $974.50

                                                =.0359

                                                =3.59%