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20 July, 06:11

Too Young, Inc., has a bond outstanding with a coupon rate of 6.9 percent and semiannual payments. The bond currently sells for $1,905 and matures in 15 years. The par value is $2,000. What is the company's pretax cost of debt? Multiple Choice 7.51% 7.43% 7.98% 7.72% 3.65%

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  1. 20 July, 06:18
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    7.43%

    Explanation:

    Where the debt is publicly traded, the cost of debt is equal to the yield to maturity

    Approximate yield to maturity = [coupon + (face value - market price) / number of years to maturity ] / [{face value + market price]/2]*100

    Face value - 2000

    Market price - 1905

    years to maturity = 30 years

    Coupon = (6.9%*2000) / 2 = 69

    Workings

    [69 + (2000-1905) / 30] / [ (2000+1905]/2 * 100)

    ([69+3.17]/[ (3905]/2*100)

    (72.17/1952) * 100 = 3.70

    Annual yield = 3.7*2 = 7.4%

    7.4 % being an approximate yield value, the closest option is 7.43%
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