KatyDid Clothes has a $150 million ($1,000 face value) 15-year bond issue selling for 86 percent of par that carries a coupon rate of 8 percent, paid semiannually. What would be KatyDid's before-tax component cost of debt?
A) 4.90 percent
B) 8.13 percent
C) 9.80 percent
D) 7.09 percent

Question

Quizplus · Accepted Answer

The before-tax component cost of debt is the yield to maturity (YTM) on the bond. The bond sells for 86% of par, or $860. With a $1,000 face value, an 8% annual coupon rate, and semiannual payments, the semiannual coupon payment is $40. The bond has 30 periods (15 years * 2). Solving for YTM using these inputs gives approximately 4.90% per period, or 9.80% annually.

KatyDid Clothes Has a $150 Million ($1,000 Face Value) 15-Year