Too Young, Inc., has a bond outstanding with a coupon rate of 6.9 percent and semiannual payments. The bond currently sells for $1,905 and matures in 15 years. The par value is $2,000. What is the company's pretax cost of debt? Multiple Choice 7.51% 7.43% 7.98% 7.72% 3.65%

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Business

Murray

19 December, 19:12

Too Young, Inc., has a bond outstanding with a coupon rate of 6.9 percent and semiannual payments. The bond currently sells for $1,905 and matures in 15 years. The par value is $2,000. What is the company's pretax cost of debt? Multiple Choice 7.51% 7.43% 7.98% 7.72% 3.65%

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Jolie Osborn · Answer 1

7.43%

Explanation:

Where the debt is publicly traded, the cost of debt is equal to the yield to maturity

Approximate yield to maturity = [coupon + (face value - market price) / number of years to maturity ] / [{face value + market price]/2]*100

Face value - 2000

Market price - 1905

years to maturity = 30 years

Coupon = (6.9%*2000) / 2 = 69

Workings

[69 + (2000-1905) / 30] / [ (2000+1905]/2 * 100)

([69+3.17]/[ (3905]/2*100)

(72.17/1952) * 100 = 3.70

Annual yield = 3.7*2 = 7.4%

7.4 % being an approximate yield value, the closest option is 7.43%