Question

Cost of debt with fees. Kenny Enterprises will issue a bond with a par value of ​$1000​, a maturity of twenty​ years, and a coupon rate of 8.0​% with semiannual​ payments, and will use an investment bank that charges ​$25 per bond for its services. What is the cost of debt for Kenny Enterprises at the following market​ prices?

A. $920

B. $1,000

C. $1,080

D. $1,173

Answer 1

net proceeds = market price- cost of issue

maturity value =1000

n=20*2=40

interest =1000*8%=80 annually

semi annual is 40

1)when market price =920

net proceeds= 920-25 =985

=42.625/947.5

=4.5% semi annually

=9% p.a

2)when market price =1000

net proceeds= 1000-25 =975

=40.62/987.5

=4.11% semi annually

=8.23% p.a

3)when market price =1080

net proceeds= 1080-25 =1055

=38.625/1027.5

=3.76% semi annually

=7.52% p.a

4)when market price =1175

net proceeds= 1175-25 =1150

=36.25/1075

=3.37% semi annually

=6.74% p.a