Hydro Systems has bonds outstanding with a face value of $1,000, 13 years to maturity, and a coupon rate of 6.5 percent, paid annually. What is the company's pretax cost of debt if the bonds currently sell for $1,056?
A) 5.87 percent
B) 6.42 percent
C) 4.71 percent
D) 5.36 percent
E) 5.55 percent

Question

Quizplus · Accepted Answer

The pretax cost of debt can be calculated using the yield to maturity (YTM) formula, which equates the present value of the bond's future cash flows (coupon payments and the face value at maturity) to its current market price. Given the bond's annual coupon payment ($1,000 * 6.5% = $65), its face value ($1,000), its current market price ($1,056), and the number of years to maturity (13), solving for the YTM gives a pretax cost of debt of approximately 5.87 percent.

Hydro Systems Has Bonds Outstanding with a Face Value of $1,000