Ernst's Electrical has a bond issue outstanding with ten years to maturity. These bonds have a $1,000 face value, a 5 percent coupon, and pay interest semi-annually. The bonds are currently
Quoted at 96 percent of face value. What is Ernst's pre-tax cost of debt?

Question

Quizplus · Accepted Answer

The pre-tax cost of debt is the yield to maturity (YTM) on the bonds. The bonds have a face value of $1,000, a coupon rate of 5% (which means $50 annual interest, or $25 semi-annually), and are quoted at 96% of face value ($960). Using the YTM formula for bonds, considering semi-annual payments, the YTM is approximately 5.53%.

Ernst's Electrical Has a Bond Issue Outstanding with Ten Years