Milton Company issued bonds 10 years ago with a coupon rate of 10 percent at a price of $1,000. The current price of the bonds is $980. The before-tax cost of the debt to the company is still 10 percent.

Question

Quizplus · Accepted Answer

The current price of the bonds being lower than the face value indicates that the yield (or market interest rate) is now higher than the bond's coupon rate of 10 percent. Therefore, the before-tax cost of the debt to the company is now higher than 10 percent.

Milton Company Issued Bonds 10 Years Ago with a Coupon