Question

The long-term debt of Topstone Industries is currently selling for 104.50% of its face value. The issue matures in 10 years and pays an annual coupon of 8%. What is the cost of debt?

Answer 1

Cost of debt = 7.35%

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Par value = 100

Price = 104.5

Annual coupon = 8

Term = 10 years

Yield to maturity is the rate of return the investor will get if he/she hold the bold till maturity period

So YTM is like internal rate of return, if we discount all the cash inflow from the bond using YTM, the present value will be equal to the bond current price.

YTM is calculated using Excel, the function used is (IRR)

Pls refer below table

Year	Cash flow	Amount
0	Bod price (Outflow)	-104.5
1	Coupon (Inflow)	8
2	Coupon (Inflow)	8
3	Coupon (Inflow)	8
4	Coupon (Inflow)	8
5	Coupon (Inflow)	8
6	Coupon (Inflow)	8
7	Coupon (Inflow)	8
8	Coupon (Inflow)	8
9	Coupon (Inflow)	8
10	Par + Coupon (Inflow	108
	YTM	7.35%
	Formula	=IRR(G44:G64)

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Hope that helps.

Feel free to comment if you need further assistance J