Suppose your firm issues a €100,000,000 one-year bond with a coupon rate of 8 percent per annum. The underwriting spread is 2 percent. Your actual cost of this debt is

Question

Quizplus · Accepted Answer

The actual cost of the debt is calculated by adding the underwriting spread to the bond's yield to maturity. The yield to maturity is the rate required by investors to purchase the bond. 
Therefore, the yield to maturity is:
100,000,000 x 8% = 8,000,000
100,000,000 + 8,000,000 = 108,000,000
The underwriting spread is 2 percent of the face value of the bond, which equals:
100,000,000 x 2% = 2,000,000
The actual cost of the debt is:
(8,000,000 + 2,000,000)/100,000,000 = 10.2%
Therefore, the correct answer is C, 10.2 percent.

Suppose Your Firm Issues a €100,000,000 One-Year Bond with a Coupon