Titans has 7 percent bonds outstanding that mature in 16 years.The bonds pay interest semiannually and have a face value of $1,000.Currently,the bonds are selling for $1,015 each.What is the firm's pretax cost of debt?

Question

Quizplus · Accepted Answer

The pretax cost of debt is the yield to maturity (YTM) on the bonds. Given the bond's price, coupon rate, and maturity, the YTM can be calculated using the formula for bond pricing. The bond pays $35 every six months (7% of $1,000 annually, divided by 2), has 32 periods (16 years * 2), and a face value of $1,000. Solving for YTM using these inputs gives approximately 6.84% annually.

Titans Has 7 Percent Bonds Outstanding That Mature in 16