The approximate before-tax cost of debt for a 10-year, 8 percent, $1,000 par value bond selling at $1,150 is ________.
A) 5.97 percent
B) 8.33 percent
C) 8.82 percent
D) 9 percent

Question

Quizplus · Accepted Answer

The before-tax cost of debt is calculated using the yield to maturity (YTM) formula, which takes into account the current market price, par value, coupon rate, and time to maturity. Given the bond is selling at a premium ($1,150 > $1,000), the yield (cost of debt) will be lower than the coupon rate of 8%. The closest approximation to the calculated YTM given the options is 5.97 percent.

The Approximate Before-Tax Cost of Debt for a 10-Year, 8