Four years ago,the Morgan Co.issued 15-year,7.0 percent semiannual coupon bonds at par.Today,the bonds are quoted at 101.6.What is this firm's pretax cost of debt?

Question

Quizplus · Accepted Answer

The bond was issued at par, which means the coupon rate is equal to the yield to maturity (YTM) at the time of issuance. Since the coupon rate is 7.0 percent semiannually, the annual coupon payment is:

Coupon payment = 7.0% x $1,000 = $70

Since the bond is currently quoted at 101.6, its price is:

Price = 101.6% x $1,000 = $1,016

The bond has 15 years to maturity and pays semiannual coupons, so it has a total of 30 coupon payments. To calculate the YTM, we can use the following formula:

Price = (Coupon payment / YTM) x [1 - 1/(1+YTM)^n] + $1,000/(1+YTM)^n

where n is the number of periods (i.e., 30 for this bond).

Solving this equation for YTM gives us:

YTM = 6.79%

Therefore, the firm's pretax cost of debt is 6.79%. The correct answer is C).

Four Years Ago,the Morgan Co