KatyDid Clothes has a $150 million ($1,000 face value) 15-year bond issue selling for 106 percent of par that carries a coupon rate of 8 percent, paid semiannually. What would be KatyDid's before-tax component cost of debt?
A) 3.67 percent
B) 7.34 percent
C) 8.12 percent
D) 7.09 percent

Question

Quizplus · Accepted Answer

The before-tax component cost of debt is the yield to maturity (YTM) on the bond. Since the bond sells for 106% of par, its price is $1,060. The bond pays a semiannual coupon of $40 ($1,000 * 8% / 2). Using the bond price, coupon payments, and face value, the YTM can be calculated, which is approximately 7.34% annually.

KatyDid Clothes Has a $150 Million ($1,000 Face Value) 15-Year