The before-tax cost of debt for a 15-year,10 percent,$1,000 par value bond selling at $950 is ________.

Question

Quizplus · Accepted Answer

The before-tax cost of debt can be calculated using the following formula:
Before-tax cost of debt = (Annual interest payment / Bond price) x 100
Annual interest payment = 10% x $1,000 = $100
Bond price = $950
Before-tax cost of debt = ($100 / $950) x 100
Before-tax cost of debt = 10.53% or 10.5% (rounded to one decimal point)
Therefore, the closest option is B, which is 10.7 percent.

The Before-Tax Cost of Debt for a 15-Year,10 Percent,$1,000 Par