In: Accounting
Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 16 years to maturity that is quoted at 91 percent of face value. The issue makes semiannual payments and has an embedded cost of 10 percent annually.
The Company’s cost of debt
Variables |
Financial Calculator Keys |
Figure |
Par Value/Face Value of the Bond [$1,000] |
FV |
1,000 |
Coupon Amount [$1,000 x 10.00% x ½] |
PMT |
50 |
Market Interest Rate or Yield to maturity on the Bond |
1/Y |
? |
Maturity Period/Time to Maturity [16 Years x 2] |
N |
32 |
Bond Price/Current Market Price of the Bond [-$1,000 x 91%] |
PV |
-910 |
We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the semi-annual yield to maturity on the bond (1/Y) = 5.61%.
The semi-annual Yield to maturity = 5.61%.
Therefore, the annual Yield to Maturity of the Bond = 11.22% [5.61% x 2]
“Hence, the Waller, Inc Company's cost of debt will be 11.22%”